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Hello Everyone,
The abondonment option does not make sense to me. As a Real option it gives the opportunity to a manager to exit a project.
The book p 50 says " If the cash flow from exiting a project (abondonment value) exceed the present value of the cash flow of continuing this project, managers should exercise the abondonment option"
Intuitively I thought if the Pv of the continuing CF is LOWER than exiting the project, then one should exit it. I don’t get why it’s the other way around. Could you explain ?
Thanks
- Phil