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June 5, 2018 at 1:40 pm
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 🙂
John Moffat says
June 5, 2018 at 3:33 pm
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.
June 6, 2018 at 2:45 am
Thank you for the clarification Sir.
So when using the option pricing formulas :
Pe : Actual expense / cost of abandonment (not Pv) Pa : Pv of cashflow
June 6, 2018 at 6:32 am
April 27, 2018 at 10:08 am
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?
November 27, 2017 at 7:12 pm
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
November 28, 2017 at 8:09 am
It is possible (and when it has been asked, the examiner has given a formula for it).
November 4, 2017 at 3:49 am
Mr John, In my understanding value of option is what we pay for the option. But from this example it appears c is the total value including option price.
Please could you clarify.
November 4, 2017 at 9:03 am
The lecture needs re-recording. The value added by the option is 3.92 – 2 = 1.92M (see the printed answer in the lecture notes).
September 4, 2017 at 12:45 pm
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?
April 21, 2017 at 6:36 pm
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??
April 21, 2017 at 8:48 pm
The examiners answer was wrong (and he has since accepted this). What you have written is correct 🙂
April 19, 2017 at 9:09 pm
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?
April 20, 2017 at 7:54 am
It is not that they are paying for the option.
If the option exists then the project is more beneficial than if it does not exist.
April 20, 2017 at 6:48 pm
Thanks. by looking at the answer in notes, I realise that 3.92m is full value of the project with the option, so without option is NPV 2m, the value of option is 1.92m which is different from the lecture. Is it right?
April 21, 2017 at 5:52 am
That is correct
December 3, 2016 at 5:02 am
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.
December 3, 2016 at 8:50 am
The difference is that the option in the lecture notes is an option to delay the existing project, but the March/June question was the option to expand – effectively to do the project as it is but to have the option to invest more and get more (almost like the option to do an extra project).
December 3, 2016 at 2:36 pm
so for the delay/abandon option, total value of project would be the value of the option
for the expand option, the total value of project would be the value of the option + original NPV.
am i correct?
December 3, 2016 at 3:56 pm
That is correct 🙂
May 29, 2018 at 12:14 pm
Hello, I just read the article (https://www.accaglobal.com/gb/en/student/exam-support-resources/professional-exams-study-resources/p4/technical-articles/investment-appraisal.html), the example of abandon option, NPV is negative 0.45m, put option 3.45m, then it says “Net present value of the project with the put option is approximately $3m ($3.45m – $0.45m)”. it seems the total value of the project with abandon option is the put option plus original NPV?
November 28, 2016 at 1:53 pm
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?
November 28, 2016 at 2:08 pm
The second line.
November 29, 2016 at 2:12 am
how about the put option? if p = $3m, NPV is 2m, so the abandon option is worth 3-2m=1m?
November 29, 2016 at 5:27 am
December 1, 2016 at 11:01 am
I’m a bit confused, in the lecture and comments below you have explained that 3,92 makes the value of the whole project greater than it would have been without the option to delay and the full value of the project is 5.92. However in this comment and in lecture notes the full value is 3,92.
Can you please explain it in more details.
Thanks a lot!
December 1, 2016 at 3:14 pm
The comment above and the answer in the lecture notes are correct, and I must re-record the lecture – thank you for reminding me.
My excuse is that I did in the lecture what the examiner did in his answer the first time calculations on real options were asked.
More recently the examiner realised he was wrong! I will re-record the lecture. (All the other figures will obviously remain unchanged)
December 1, 2016 at 7:19 pm
Thank you so much!
December 2, 2016 at 7:31 am
You are welcome 🙂
November 4, 2016 at 6:21 am
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?
November 4, 2016 at 7:34 am
The value of the project is the PV of the future flows – not the NPV. The NPV is the value of the returns less the investment.
August 11, 2017 at 4:42 am
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
September 4, 2017 at 12:44 pm
March 29, 2016 at 7:37 am
I’m struggling to perform the calculation on the last part of the call option formula, that is with the “e”. Can you please clarify one by one.
March 29, 2016 at 9:04 am
Have you watched the lectures on normal option pricing, because I go through the steps slowly in that lecture?
June 7, 2016 at 1:15 pm
Instead of using e use 2.71828 that will make the calculation not confusing.
June 7, 2016 at 1:46 pm
I don’t really understand why that makes it less confusing. You must have a scientific calculator in the exam and it should have a button for e^x, and using that button is a bit faster than typing out e to 5 decimal places 🙂
June 7, 2016 at 1:58 pm
Maybe i did not understand his problem but from the way i understood it i think it has to do with him using his scientific calculator cause nothing can be confusing about that e .
November 22, 2015 at 7:49 pm
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.
October 8, 2015 at 10:48 am
d2 was .8727, why did we round to .88 and not .87 when looking for N(d2)?
October 8, 2015 at 12:05 pm
My mistake – I should have used 0.87 (or even better apportioned between 0.87 and 0.88, but there is no real need to do that).
May 26, 2015 at 12:40 pm
Hi Lecture how do you arrive to 0,.3888 I understand how to get to 1,2 in the table but not how to get to 0.3888
May 26, 2015 at 2:36 pm
You look to the row for 1.2 and the column for 0.02
I don’t know if you have watched the previous lectures on share options, but I spend time in that lecture showing how to use the tables.
April 11, 2015 at 1:14 pm
Why and how is the option in the example a call option? I did not really get the justification.
April 11, 2015 at 4:22 pm
Because you have the option to invest at a fixed cost on a future date (just like a call option for shares gives you the right to buy at a fixed price on a future date).
April 11, 2015 at 6:14 pm
Oh I get. Thanks a lot.
February 26, 2015 at 11:44 am
December 25, 2014 at 9:08 am
Can you please add an option to adjust the speed of the video? Although it is very informative, I find it hard to concentrate at a low pace. Thank you
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