Implications

The fact that the option to abandon has value provides a rationale for firms to build the flexibility to scale back or terminate projects if they do not measure up to expectations. Firms can do this in a number of ways. The first, and most direct way, is to build in the option contractually with those parties that are involved in the project. Thus, contracts with suppliers may be written on an annual basis, rather than long term, and employees may be hired on a temporary basis, rather than permanently. The physical plant used for a project may be leased on a short term basis, rather than bought, and the financial investment may be made in stages rather than as an initial lump sum. While there is a cost to building in this flexibility, the gains may be much larger, especially in volatile businesses.

Lessons From The Intelligent Investor

Lessons From The Intelligent Investor

If you're like a lot of people watching the recession unfold, you have likely started to look at your finances under a microscope. Perhaps you have started saving the annual savings rate by people has started to recover a bit.

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