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  1. Dear sir,

    In the March/June 16 exam Q4 is similar but they had discounted the pv of cash flows (Pa). The Pe was 15 and the NPV was 0. Pa was 10.68 (15 x 0.712) which is not the case for this question. Why is that so? As both are delay options.

    Thank you in advance 🙂

    • In the March/June questions, they have not discount the PV of the cash flows (it would be silly to discount a present value). What they have done is calculated the PV of the cash flow (the flow being $15 in 3 years time).

      The same applies to the lecture example (which is also a past exam question), but the reason we don’t need to discount is because it is already discounted – given that the outlay is $10M now, and the NPV is 0, then the PV of the flows has to also be $10M. Since this is already a present value, it is already discounted.

  2. Dear John,

    In Kaplan Book, it states,”all options to delay/defer, option to switch/redeploy and option to expand/follow-on are call option.
    But in opentuition, notes option to switch/redeploy is considered as put option,, so i am confused,,, is Option to switch/redeploy call or put option?,, i want to confirm this with you. &

    In case of option to abandon,,,
    how is Pa and Pe and t is computed?

  3. Hi is it liekly we could be asked to work out the value of a put option? and if it could be tested would we just find the put option using the black scholes model and then just deduct the NPV Thanks

  5. Hi John,

    I am also bit confused. Because in the share pricing lecture we state that Pa is the current market value – which I would see as the current investment, the 10mio. Pe is the expected value of the project – for me this is what I get at the end, so 12 mio. Could you please clarify a bit here?

    Thanks!
    Ana

  6. Thanks John,

    However, I’m still confused with examiner’s answer re: Q4 June 2011 MMC, option to delay. The call option=$9.53m=full value of project with option to delay. because NPV is negative -2.98m =value of the project without option is -2.98m, so the value added by option should be 9.53-(-2.98)=12.51.

    I don’t understand the examiner’s answer below:
    Overall value of the project = $9·53m – $2·98m = $6·55m.
    I thought overall value is $9.53m??

  7. hi John,

    I get confused with the full value of project. The value of the call option to delay is 3.92m, does it mean the company has to pay 3.92m to buy this option to delay the project? id it is the case, then NPV=2m, the full value of the project will be 2-3.92=-1.92. the company made a loss?

    Thanks.

  8. Hi Sir,

    i refer to the March/June 2016 SAMPLE Question 4, real option.

    The NPV of the project is -1.01M, the call option is 1.36M, so the overall value is 1.36-1.01=0.35.

    This is different from what u reply on 28 November 2016, so i am confused now.

  9. c=3.92m. how do we interpret this amount ? NPV is 2M, so the total NPV + delay option is 2+3.92= 5.92M?

    or total NPV + delay option is 3.92m, and the delay option is worth 3.92-2=1.92M?

  10. Hi John,

    In the example we take Pa as 12m as the value of the project. Shouldn’t we be taking Pa as 2m ie the NPV as that can also be denoted as the value of the project?

    Thanks.

      • Just to get clarification on this. From the start of your lecture you mentioned that value of the project = NPV, which concurs with Arun’s question. I am now confused with your answer to his question. Would you kindly clarify as i am kind like getting two conflicting sets of information thanks

      • Hi John,

        I am also bit confused. Because in the share pricing lecture we state that Pa is the current market value – which I would see as the current investment, the 10mio. Pe is the expected value of the project – for me this is what I get at the end, so 12 mio. Could you please clarify a bit here?

        Thanks!
        Ana

  12. Hi,
    I find the most confusing part to define Pa and Pe. in this case maybe these variables are more straightforward, but in other cases like adandon, redeploy or expand they are less clear. Could you please provide guidelines how to define these variables.

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