Abstract
The abandonment option under various capital budgeting models are discussed in this manuscript to bring forth the notion that present value of cash flows is often improperly estimated in the financial models utilized in the decision analytic process. In this study, Intellectual Property Rights and other intangible assets often are not considered in accounting estimation processes utilized in financial accounting. A decision maker often utilizes misestimates of the present value of cash flow resulting in less than optimum capital budgeting decisions. Decisions to abandon for salvage and other similar decisions improve when the present value of intangibles and property rights are included in the decision process. This last statement is the goal of this study and to present well founded processes to improve abandonment and similar decisions in capital budgeting decisions. The estimation problem in financial accounting is included in the analysis to accomplish this goal.
Highlights
In recent years, investors observed the importance of intellectual capital disclosure when making decision concerning the option to abandon projects that are expected to be unprofitable or undesirable The cause of these undesirable opportunities are often related to the value of intellectual and/or intangible capital
The abandonment option under various capital budgeting models are discussed in this manuscript to bring forth the notion that present value of cash flows is often improperly estimated in the financial models utilized in the decision analytic process
Decisions to abandon for salvage and other similar decisions improve when the present value of intangibles and property rights are included in the decision process
Summary
Investors observed the importance of intellectual capital disclosure when making decision concerning the option to abandon projects that are expected to be unprofitable or undesirable The cause of these undesirable opportunities are often related to the value of intellectual and/or intangible capital. We review in this study the research on the quality and extent to which intellectual capital is handle or not handled in the accounting literature underlying financial reporting of economic invents involving intangible and intellectual capital The research findings by Shareef and Davey indicated a positive and statistically significant relation between the size of clubs, club performance and their overall intellectual capital disclosure. This result was in line with other studies in other industries. They detail why accounting reporting is losing relevance in today's decisions related to capital budgeting and the abandonment option
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