What is the meaning of ‘Abandonment Value’?
Abandonment Value of a project is the correspondent cash value on immediate liquidation or sale after removing all debts which have to be paid back. In other words, it is also the liquidation value of the project or an asset. Generally, if the estimated resale value of the project or asset is higher than the NPV or Net Present Value of the expected cash flows, the project is considered as abandoned.
It is an important statistic for the information of the firms. If the project is not profitable it is better to discontinue the same. It is also vital in filing bankruptcy where most assets are resold at a discounted price.
The optimal economic life of an asset is 4 years and the expected cash flows mostly change over the life of the project. The companies generally look at abandonment value to analyse its profitability and to decide if it is to be maintained or sold. It can vary for reasons like liquidity, supply-demand, etc.