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A Note on Abandonment Value and Capital Budgeting

Published online by Cambridge University Press:  19 October 2009

Bernard Schwab  and
Peter Lusztig
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Extract

In a recent article, Professors Robichek and Van Horne have noted the importance of considering abandonment in the capital budgeting process. The basic point of their paper is that:

… a project should be abandoned at that point in time when its abandonment value exceeds the net-present value of the subsequent expected future cash flows discounted at the cost-of-capital rate.

Type
Communications
Information
Journal of Financial and Quantitative Analysis , Volume 5 , Issue 3 , September 1970 , pp. 377 - 379
Copyright
Copyright © School of Business Administration, University of Washington 1970

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References

1 Robichek, A. A. and Van Home, J. C., “Abandonment Value and Capital Budgeting,” Journal of Finance, XXII (December 1967), pp. 577–589.Google Scholar

2 Ibid., p. 578.

3 Dyl, E. A. and Long, H. W., “Abandonment Value and Capital Budgeting: Comment,” Journal of Finance, XXIV (March 1969), pp. 88–95.CrossRefGoogle Scholar

4 Ibid., p. 89.

5 Robichek, A. A. and Van Home, J. C., “Abandonment Value and Capital Budgeting: Reply,” Journal of Finance, XXIV (March 1967), pp. 96–97.Google Scholar

6 Included are those cash flows generated by possible abandonment as proposed by Robichek-Van Home and Dyl-Long.

7 For simplicity, let us assume that t would be the optimal time to switch to the new project.

8 Schwab, Bernard, “Investment Evaluation in a Dynamic Environment: Some Notes on the Notion of Flexibility and the Role of Uncertain Future Opportunities”(presented at the 34th National Meeting of the Operations Research Society of America,Philadelphia,November 6–9, 1968).Google Scholar See also Working Paper No. 14, Faculty of Commerce and Business Administration, The University of British Columbia, October 1968.

9 Schwab, Bernard, “Current Limitations and Possible Extensions of Some Common Criteria for Investment Evaluation”(presented at the NATO Symposium on Cost-Effectiveness Analysis,The Hague,July 7–14, 1969, proceedings in press).Google Scholar