Table of Contents
Advances in Decision Sciences
Volume 2016, Article ID 7605909, 12 pages
http://dx.doi.org/10.1155/2016/7605909
Research Article

Assessing the Option to Abandon an Investment Project by the Binomial Options Pricing Model

Departamento de Economía y Empresa, Universidad de Almería, La Cañada de San Urbano, s/n, 04120 Almería, Spain

Received 20 September 2015; Revised 16 December 2015; Accepted 17 January 2016

Academic Editor: Kwai S. Chin

Copyright © 2016 Salvador Cruz Rambaud and Ana María Sánchez Pérez. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

Usually, traditional methods for investment project appraisal such as the net present value (hereinafter NPV) do not incorporate in their values the operational flexibility offered by including a real option included in the project. In this paper, real options, and more specifically the option to abandon, are analysed as a complement to cash flow sequence which quantifies the project. In this way, by considering the existing analogy with financial options, a mathematical expression is derived by using the binomial options pricing model. This methodology provides the value of the option to abandon the project within one, two, and in general periods. Therefore, this paper aims to be a useful tool in determining the value of the option to abandon according to its residual value, thus making easier the control of the uncertainty element within the project.