Which factor would you explicitly model to capture extension options in a sale timetable?

• A. Extension options only affect debt service, not sale.
• B. Include an extension option with a separate decision node, potentially affecting hold period and exit timing.
• C. Always exercise extension automatically.
• D. Extension options should be ignored in modeling.

Answer: (B)

Capturing optionality in sale timing by modeling extension options as a separate decision node. Modeling the extension option explicitly allows the model to reflect a real decision: whether to extend the hold period and when to exit. This choice can change the exit timing, the leverage/debt service dynamics, and the sequence of cash flows, which in turn affects returns (IRR, NPV) and the risk profile. By putting the extension as its own decision node, you can test how different extension terms, probabilities, and decision criteria influence the optimal exit strategy.

Why this is the best approach: it directly represents the action the option gives you and its impact on key timing and financials, keeping the model flexible and faithful to the investment decision process.

Why the other approaches are not suitable: treating extension as only affecting debt service ignores how a later exit changes returns; always exercising automatically removes the strategic choice; ignoring extension altogether misses potential upside or downside from delaying exit.