Abandonment Value - Explained
What is Abandonment Value?
Written by Jason Gordon
Updated at April 16th, 2022
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What is Abandonment Value?
An abandonment value refers to the cash value earned on a project after it has been abandoned or discontinued. A project or an asset can be abandoned (liquidated or sold) if its net present value of expected cash flow is lower than the amount received for salvage. Hence, the value of the asset after it has been sold or liquidated is its abandonment value. Quite a number of factors determine the abandonment value that could be attributed to a project after it has been liquidated or sold. For instance, liquidity, fair value appraisals, supply and demand factors can affect abandonment value.
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How Does Abandonment Value Work?
The cash value or its equivalent that an asset yields after it is discontinued or abandoned refers to abandonment value. Certified appraisers often conduct periodic appraisals of assets in an investment market, this is to determine the profitability or loss attributed to the assets. If an asset is profitable, there is no need to abandon it, if otherwise, it can be sold or liquidated. When assets are liquidated, they are returned to the investor in cash value or its equivalent, this is the abandonment value. When the executives of a company perceive that an asset will not be profitable, they lack the desire to maintain it. In a situation like this, the asset will be sold at distress or at a liquidation price, the amount realized from the sale or liquidation is the abandonment value.