illustrate,assumethatVistheremainingvalueonaprojectif
itcontinuestotheendofitslifeandListheliquidationor
abandonmentvalueforthesameprojectatthesamepointin
time.Iftheprojecthasaremaininglifeofnyears,thevalue
ofcontinuingtheprojectcanbecomparedtotheliquidation
(abandonment)value.Ifthevaluefromcontinuingishigher,
theprojectshouldbecontinued;ifthevalueofabandonment
is higher, the holder of the abandonment option could
considerabandoningtheproject.Thepayoffscanbewritten
as:
ThesepayoffsaregraphedinFigure12.6asafunctionofthe
expectedstockprice.Unlikethepriortwocases,theoptionto
abandon takes on the characteristics of a put option.
FIGURE 12.6The Option to Abandon a Project
ILLUSTRATION 12.10: Valuing an Option to Abandon:
Airbus and Lear Aircraft
AssumethatLear Aircraftisinterestedin buildinga small
passengerplaneandthatitapproachesAirbuswithaproposal