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The effects of an uncertain abandonment value on the investment decision

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  • Roger Adkins
  • Dean Paxson

Abstract

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.

Suggested Citation

  • Roger Adkins & Dean Paxson, 2017. "The effects of an uncertain abandonment value on the investment decision," The European Journal of Finance, Taylor & Francis Journals, vol. 23(12), pages 1083-1106, September.
    • Handle: RePEc:taf:eurjfi:v:23:y:2017:i:12:p:1083-1106
    DOI: 10.1080/1351847X.2015.1113195
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    Cited by:

    1. Yu Zeng & Weidong Chen, 2019. "The Determination of Concession Period for Build-Operate-Transfer Solar Photovoltaic Power Project under Policy Incentives: A Case Study of China," Energies, MDPI, vol. 12(18), pages 1-23, September.
    2. Chen, Weidong & Zeng, Yu & Xu, Chongqing, 2019. "Energy storage subsidy estimation for microgrid: A real option game-theoretic approach," Applied Energy, Elsevier, vol. 239(C), pages 373-382.

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