Practical Considerations

In the above analysis, we assumed, rather unrealistically, that the abandonment value was clearly specified up front and that it did not change during the life of the project. This may be true in some very specific cases, in which an abandonment option is built into the contract. More often, however, the firm has the option to abandon, and the salvage value from doing so can be estimated with noise up front. Further, the abandonment value may change over the life of the project, making it difficult to apply traditional option pricing techniques. Finally, it is entirely possible that abandoning a project may not bring in a liquidation value, but may create costs instead; a manufacturing firm may have to pay severance to its workers, for instance. In such cases, it would not make sense to abandon, unless the cash flows on the project are even more negative.

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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