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Hi tutors!
I have been looking at the usage of real options for making financial strategy decisions. From the technical articles from ACCA, Pe = investment required for the project and Pa = PV of the net cash inflows (must exclude Pe).
However, according to the lectures on OpenTuition chapter 14, Pa = Pe + PV of the net cash inflows, which is conflicting to that in the technical article.
Can any tutors help clarify?
There is no conflict whatsoever.
The NPV is $2M. The NPV as always is the PV of the future cash flows less the initial investment. Given that the initial investment is $10M, then the PV of the future cash flows must be $12M. Pe has nothing to do with this.
This example is based on an actual exam question.(I assume that you have watched the lectures working through this example? Using the notes without watching the lectures would be completely pointless
)
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