Can someone describe the main differences!!! I’m having issues with these!
Say you open a lemonade stand this year. If it goes well, you can open another one at the other end of the street. If it goes poorly, you can close it down. The first is an example of the option to expand and the latter is abandonment. This is about as simple as it could ever get.
More seriously, a company starts up production of a new product. If sales take off, they have the option to build out the facilities and ramp up production. If something bad happens, they can cut the original project and lose less than if they operate for years in bad circumstances. Obviously, the right decision depends on whether you have a higher NPV by expanding, doing nothing, or cutting the project.