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I have this question from a BPP note for a put option:
“Company X is a considering an investment in a joint venture to develop high quality office blocks to be let out to blue chip corporate clients. This project has a 30-year life, and is expected to cost Company X £90m and to generate an NPV of £10m for Company X. The project manager has argued that this understates the true value of the project because the NPV of £10m ignores the option to sell Company X’s share in the project back to its partner for £40m at any time during the first ten years of the project.”
The answer for Pa used for option pricing was (90+10) * 2/3 = 66.7. I dont understand why 2/3 was used to calculate Pa? What I understand is that the duration of the put option is 10 years, but the project is 30 years in total. Then the Pa, which is the PV of inflows, should be assumed to be 1/3 of the total 30 years of inflows = 100*1/3.
Can you help me understand why I was wrong?
Thanks
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