What is ‘Abandonment Value’
The value of a project or asset if it were immediately liquidated or sold. The abandonment value of an asset or project can vary for a variety of reasons including liquidity, supply-demand factors and implied fair value appraisals performed by certified appraisers.
Explaining ‘Abandonment Value’
The abandonment value is generally a cash value, or equivalent, associated with an asset. This value is important for companies when analyzing the profitability of particular projects or assets and deciding whether they should be maintained or abandoned. Abandonment values are also an important factor in bankruptcy proceedings, where assets are typically sold at distressed or liquidation prices.
Abandonment Value FAQ
What is abandonment value?
Abandonment value is the value of an investment or project of it were to be sold or liquidated immediately.
What is abandonment option?
An abandonment option is a clause included in an investment contract that permits either party to withdraw from the contract before maturity.
What is the value of the abandonment option?
Abandonment value, also known as liquidation value, refers to the cash value of a project if the contract is ended after deducting all debts that must be repaid.
How do you calculate the real value of an option?
NPV = F / [ (1 + r)^n ] where, PV = Present Value, F = Future payment (cash flow), r = Discount rate, n = the number of periods in the future is the most straightforward approach to real options pricing.
What are types of real options?
Common types of real options include option to wait, option to abandon, option to switch, option to expand, and option to contract.
Further Reading
- Abandonment value and project life – books.google.com [PDF]
- Strategic parameters for capital budgeting when abandonment value is stochastic – www.tandfonline.com [PDF]
- The effects of an uncertain abandonment value on the investment decision – www.tandfonline.com [PDF]
- On optimal asset abandonment and replacement – www.jstor.org [PDF]
- Investor valuation of the abandonment option – www.sciencedirect.com [PDF]
- Real options and interactions with financial flexibility – www.jstor.org [PDF]
- The role of abandonment value in capital asset management – www.tandfonline.com [PDF]
- Uncertainty and the abandonment option – www.tandfonline.com [PDF]
- Valuation of the minimum revenue guarantee and the option to abandon in BOT infrastructure projects – www.tandfonline.com [PDF]
