Abandonment option

Abandonment option

The option of terminating an investment earlier than originally planned.

Abandonment Option

A clause in some contracts allowing one party or the other to terminate the contract before completion. The abandonment option adds value to a contract that can be traded because it allows both parties a great deal of flexibility in case the contract proves unprofitable. However, the clause is most common in contracts between financial advisers and their clients.
Mentioned in ?
References in periodicals archive ?
In early research about the abandonment option, after the seminal work by Robichek and Van Horne [25], more and more literature has been concerned with abandonment options in capital budget and investment decisions.
This article considers two cases that are subject to a contractual arrangement: (1) the renter can terminate the lease prematurely without penalty (embedded abandonment option) or (2) the renter has to honor the lease terms over the life of the lease.
The second type of real option is an abandonment option, which relates to the amount of spending on advertising.
A real option-based financial model that explicitly recognizes the abandonment option when evaluating a project often increases the NPV.
Note further that because chattel property is destructible, the law conceivably could favor abandonment of chattels over abandonment of real property based on a fear that, in the absence of an abandonment option, owners of positive-value chattels will destroy the resource in question.
Typically, there are five basic types of managerial flexibility to be identified: deferral option, abandonment option, expansion option, contraction option, and switching option (9).
To value a project with an embedded abandonment option, we focus on the salvage values.
abandonment option. (69) A plaintiff can exercise a learning option by
It called on the CSA to draw up contingency plans - including "the abandonment option".
The reason is that, like conservatism, exercise of the abandonment option produces losses that are more transitory than profits.
The present paper, on the other hand, relaxes the all-equity financing assumption and allows for debt-equity financing, but assumes that the firm decides irrevocably about asset duration at time zero; i.e., it assumes that the value of the abandonment option is zero.
* Abandonment options allow exit from (or liquidation of) a project with limited expenses.