Question
In: Finance
How the option to abandon a project is reflected in business valuation？
How the option to abandon a project is reflected
in business valuation？
Solutions
Expert Solution
Abandonment option is an option that gives the parties to contract and option of abandoning the contract before the expiry.so abandonment of a project means a project which is less risky nature and it is a project which is adjusted with risk weighted and it should account for abandonment which will provide additional value to the overall project.
The cost of abandonment is to be discounted with the overall value of project and it will provide an additional advantage to the company and it is a real value option.
Valuation of these options can be done through discounting cash flows and net present value method. Real business value of these options are higher than the value of NPV in some cases .
These are a part of benefits on the faces of different business so they will always be providing additional value and such contract will have always have better net present value and acceptability criteria becausebecause they have the cost of abandonment associated with them.
jeff jeffy answered 1 year agoRelated Solutions
The option to abandon a project is more feasible for projects that A. have high liquidation...
The option to abandon a project is more feasible for projects
that
A. have high liquidation values
B. rely mostly on full-time rather than temporary workers
C. are easy to expand
D. all of the above
E. only A and B.
The potential decision to abandon a project has option value because: abandonment can occur at one...
The potential decision to abandon a project has option value
because:
abandonment can occur at one specific point in the future.
management is locked into a negative outcome.
the project may be worth more if its commencement is
delayed.
future demand may exceed expectations.
a project may be worth more dead than alive.
Within capital budgeting decisions, there are three ‘hidden’ options; option to expand, option to abandon and...
Within capital budgeting decisions, there are three ‘hidden’
options; option to expand, option to abandon and timing options.
Select one of these options and explain the option in detail with
real world example.
Within capital budgeting decisions, there are three ‘hidden’ options; option to expand, option to abandon and...
Within capital budgeting decisions, there are three ‘hidden’
options; option to expand, option to abandon and timing options.
Select option to abandon and explain the option in detail with real
world example.
Within capital budgeting decisions, there are three ‘hidden’ options; option to expand, option to abandon and...
Within capital budgeting decisions, there are three ‘hidden’
options; option to expand, option to abandon and timing options.
Select one of these options and explain the option in detail with
real world example.
Within capital budgeting decisions, there are three ‘hidden’ options; option to expand, option to abandon and...
Within capital budgeting decisions, there are three ‘hidden’
options; option to expand, option to abandon and timing options.
Select one of these options and explain the option in detail.
The following facts have been assembled to facilitate an analysis of an option to abandon a...
The following facts have been assembled to facilitate an
analysis of an option to abandon a project currently being
considered by Xiaomi Group ltd: Risk-free rate of return 8% Time
until decision to abandon is taken 0.64 years PV of cash flows if
the project is not abandoned Ksh.415 million Salvage value if
abandoned Ksh.480 million
The variance of the projects rate of return is being considered
at different levels as follows:
Var-1 3%
Var-2 6%
Var-3 9%
Var-4 12%...
The following facts have been assembled to facilitate an analysis of an option to abandon a...
The following facts have been assembled to facilitate an
analysis of an option to abandon a project currently being
considered by Xiaomi Group ltd:
Risk-free rate of return
8%
Time until decision to abandon is taken
0.64 years
PV of cash flows if the project is not abandoned
Ksh.415 million
Salvage value if abandoned
Ksh.480 million
The variance of the projects rate of return is being considered
at different levels as follows:
Var-1
3%
Var-2
6%
Var-3
9%
Var-4
12%...
The following facts have been assembled to facilitate an analysis of an option to abandon a...
The following facts have been assembled to facilitate an
analysis of an option to abandon a project currently being
considered by Xiaomi Group ltd:
Risk-free rate of return
8%
Time until decision to abandon is taken
0.64 years
PV of cash flows if the project is not abandoned
Ksh.415 million
Salvage value if abandoned
Ksh.480 million
The variance of the projects rate of return is being considered
at different levels as follows:
Var-1
3%
Var-2
6%
Var-3
9%
Var-4
12%...
Describe the three major types of business organizations and how they are reflected in the financial...
Describe the three major types of business organizations and how
they are reflected in the financial statements.
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