Abandonment option
Abandonment option is an option that allows an enterprise to reduce the capacity of its output in response to changing market conditions. This includes the option to contract production or abandon a project if market conditions deteriorate too much.
Definitions
According to Financial Management Theory and Practice by Eugene F. Brigham and Michael C. Ehrhardt (13th edition),
- Abandonment option. Allows a company to reduce the capacity of its output in response to changing market conditions. This includes the option to contract production or abandon a project if market conditions deteriorate too much.
According to Fundamentals of Financial Management by Eugene F. Brigham and Joel F. Houston (15th edition),
- Abandonment option. The option of stopping a project if operating cash flows turn out to be lower than expected. This option can raise expected profitability and lower project risk.
Related concepts
- Financial management. A combination of enterprise efforts undertaken in order to procure and utilize monetary resources of the enterprise.
