Yes / Using a three-factor stochastic real option model framework, this paper examines the effects of abandonment on the investment decision. Abandonment is classified according to whether the opportunity arises for an active operating asset post-investment, or for holding the project opportunity pre-investment. Separate analytical models are developed for the alternative forms of abandonment optionality. Numerical sensitivity analysis shows that the presence of a post-investment abandonment opportunity makes the investment opportunity appear to be more attractive because of the abandonment option value, but not by a considerable amount. Also, in contrast to the standard real option finding, an abandonment value volatility increase produces a project value threshold fall owing to the increase in the abandonment option value.
| Identifer | oai:union.ndltd.org:BRADFORD/oai:bradscholars.brad.ac.uk:10454/9505 |
| Date | 03 February 2016 |
| Creators | Adkins, Roger, Paxson, D. |
| Source Sets | Bradford Scholars |
| Language | English |
| Detected Language | English |
| Type | Article, Accepted Manuscript |
| Rights | © 2016 Taylor & Francis. This is an Author's Original Manuscript of an article published by Taylor & Francis in The European Journal of Finance on 3Feb 2016 available online at http://dx.doi.org/10.1080/1351847X.2015.1113195 |
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