An option to abandon an investment (i.e., divest or liquidate) will often increase the NPV because of its effect on reducing risk. By exiting the business, the acquirer may be able to recover a portion of its original investment and truncate projected negative cash flows associated with the acquisition.

Question

Quizplus · Accepted Answer

Abandoning an investment can reduce risk and therefore increase the net present value (NPV) of the investment. Exiting a business through divestment or liquidation can also allow for recovery of some of the initial investment and cut off potential negative cash flows.

An Option to Abandon an Investment (I