Option to abandon

Abandonment limits some downside by allowing management to compare the value of continuing with the net proceeds or value from stopping. It can resemble a put option, with the recoverable abandonment value playing a role similar to an exercise price. Consider closure costs, contractual penalties, staff and environmental obligations and whether assets can actually be sold. A fixed-course NPV may omit this flexibility, but adding option value again is wrong if the forecast already assumes optimally timed abandonment. The recoverable value itself may be uncertain.