FIN.8:4.7 - Distinguish non-entry, abandonment and switching

Declining a new investment can have zero future incremental cash in a case with no remaining obligation. Abandoning an existing activity instead creates an exit account. FIN.6 supplies the remaining cash under continuation and the dated disposal, working-capital runoff and closure effects; FIN.7 can supply realizable asset values. Include tax, cancellation, cleanup, employee and customer obligations according to the actual applicable terms. The original sunk investment does not need to be recovered before exit can be preferable.

At an exit decision date, let C be the supported value of feasible continuation and A the value of feasible abandonment, both for the same claim and remaining consequences. Choose the higher available value under the stated financial criterion. Relative to mandatory continuation, the gross value of having this exit choice at that node is max(A−C, 0). A itself can be negative: paying 5 to exit can be preferable to a remaining loss valued at 12. It is false to replace every abandonment branch with zero or with the asset’s unadjusted book value.

Past losses do not determine that comparison. Nor does stopping production automatically cancel finance or contract obligations. Retain obligations that survive exit in the relevant claim account, and use FIN.22 where the question is a wider restructuring or claimant recovery route. A contractual sale price may give an exit amount more support than a speculative salvage forecast; absent such terms, exit proceeds and timing can vary with the same adverse conditions that reduce operating value.

Switching keeps an activity available in another mode. Define the current mode, feasible destination, transition cost and delay, operating consequences and ability to switch back. Compare remaining value in the current mode with value after the transition, including lost output and future choices. A reversible switch is not a sequence of free choices of the cheapest input each instant: repeated changeover costs and minimum operating periods can make remaining in the current mode preferable even after spot prices cross.

The financial account follows the actual operating capability. A dual-fuel plant, a flexible production line or a temporary suspension may create different choices, not one generic “switching premium.” Obtain the feasible modes and constraints from the operating practice, then use FIN.6’s cash construction and this Method’s conditional comparison. If expansion, switching and abandonment share capacity or destroy one another, value the combined policy once rather than sum separately optimized options.