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    The effects of an uncertain abandonment value on the investment decision

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    Publication date
    2016
    Author
    Adkins, Roger
    Paxson, D.
    Keyword
    Real option analysis; Abandonment value; Post / pre investment
    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
    Peer-Reviewed
    Yes
    
    Metadata
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    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.
    URI
    http://hdl.handle.net/10454/9505
    Version
    Accepted Manuscript
    Citation
    Adkins R and Paxson D (2016). The effects of an uncertain abandonment value on the investment decision. The European Journal of Finance. 23(12): 1083-1106.
    Link to publisher’s version
    http://dx.doi.org/10.1080/1351847X.2015.1113195
    Type
    Article
    Collections
    Management and Law Publications

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