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Hi John,
The asset value for Jigu project $70m is discounted to show the value of cash inflows in 4 years’ time when the project will start – $46.1m. Shouldn’t the execution price $60m be discounted as well? The investment will also only take place in 4 years’ time. Thanks! Mateusz
No. In the formula for the option price, the term Pe is multiplied by an expression with ‘e’ in it.
As I do explain in my free lectures on this, the multiplying by the term with ‘e’ in it is actually discounting the exercise price on a continuous basis and so we do not discount it again 🙂
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