Question

What type of option is an option to expand operations? In what situation might an option to expand operations be rationally exercised early?

Answer 1

The Option to expand operations is a type of Real Option. Real Options are rights ( and not obligations) to make certain business decisions which include option to expand, option to abandon, option to wait, option to switch, option to wait etc.

In Option to Expand, is the option available to an entity to expand its operations in future. It provides flexibility to business operations of the company. The company can take informed decisions by taking a decision to expand if finds that option to expand will be beneficial to the company. It is under no obligation to expand.

The option to expand operations can be rationally exercised early if the company finds that it will me more beneficial for the company to expand rather than to continue as status quo i.e. the company will have incremental gains to expand now rather than to wait.