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My Npv phase one was negative …with option not delayed
And if delayed I found positive npv ….so I suggested that real options are better as they take risk and rewards as opportunities and evaluate those risks using such options by bsop bla bla and assumptions ..I took away all my time …please someone also left some or completed whole paper
What were the theory bits and Mark allocation in Q1
Something like
Soft capital rationing and finance avail if not used for 9 marks
And then something at the start before the report ??
Q1, I got discount rate 8.8% which can be rounded to 9%, so should be the same as yours… but I didn’t use APV for phase one since there is no financing effect based on my memory of the info provided by the question….
Before the report it was 5 marks to discuss use of real options build on Npv
Guys .
Although the calculations are the same the real option was AN OPTION TO EXPANDCapital allowance was on 25% reducing balance machinery
What I did was
25% of 120000=30000
90*25%=22.5
67.5*25%=16.875
50.625In the last year I took the whole 50.625 and applied tax rate as the qs said that the capital allowance would be left zero at the end of phase2 ( 4 yrs)
No surprise that time management issue came up, as such was pointed out as top one problem in the examiner report of the past few exams… I spent about 2 hours 15 minutes for question 1 and sadly had to totally skip last sub-question about soft capital rationing even though… I really rushed for optional question 2 and 4…. I probably only “reserved” (seriously totally unplanned) less than 30 minutes for question 4. I once thought I could do very little of question 4 because hedging usually required lots of calculation. Though I fully skip the last sub-question of question 4 (even didn’t have time to read what that was at all:-(, I was relatively satisfied as I managed to finish more than expected in this question….
@adurich Yeah. thats correct.
No the option was to delay ..the question said it ..so it was call option .
Same question.. could anyone please share the marks assigned to (d) soft capital rationing of question 1 and (c)..? of question 4?
@accastudentz said:
What were the theory bits and Mark allocation in Q1Something like
Soft capital rationing and finance avail if not used for 9 marks
And then something at the start before the report ??
Ok so Q1 breakdown was ;
A) how real options add value to NPV 5 marks
B) report to BOD (various calcs and discuss) 36 marks??
C) disadv of SC ration and if it were removed how finance might be gotten 9 marks
CANT BE RIGHT? , what am I missing out
I followed same logic and used balancing method for year 4, though I don’t remember the initial NCA investment figure
@adurich said:
Capital allowance was on 25% reducing balance machineryWhat I did was
25% of 120000=30000
90*25%=22.5
67.5*25%=16.875
50.625In the last year I took the whole 50.625 and applied tax rate as the qs said that the capital allowance would be left zero at the end of phase2 ( 4 yrs)
Hmm. Cant remember them specifically saying that Project E was a delay option. But its just a technicality since both are call options.
But I highly doubt it.
Anyone reading this, I highly recommend reading the technical article.
The question was entirely based on this.Yes absolutely the qs 1 was totally based on acca technical article
Investment appraise and use of real optionsFully adapted from that
@adolf121 you are right, either delay or expand, it’s a call option, making no difference when applying BSOP to calculate value of the option.
Just for discussion:-), the question says that the company has no obligation to conduct phase 2, and can decide by start of year 5 instead of now. According to below TA, it seems to me (i) an option to delay a decision to a future date, instead of (iii) an option to exploit follow-on opportunities which may arise from taking on an initial project, because both opportunities, phase one and phase two, are known now.
@adolf121 said:
Hmm. Cant remember them specifically saying that Project E was a delay option. But its just a technicality since both are call options.But I highly doubt it.
Anyone reading this, I highly recommend reading the technical article.
The question was entirely based on this.Just wanted to ask, do i need to plus the 40 basis??? i didnt add it because the question say the maximum interest will only go over 5 and minimum 3.4
@ivonne
I dont know ivonne. Im still thinking that its an expansion.Delay options do not usually come in as a nested option- an option in an option.
Where as option to expand relies on the initial phase being executed.
Since Project E’s second phase can only happen it the first phase is executed I still think its an expansion.The second phase very well could be an option to exploit follow-on opportunities.
Come to think of it, an option to expand is a delay option with the only difference being it hinges on the another phase tbeing executed before becoming available.
@streetgold yes, 40 basis point need be added on top of base rate to derive the actual borrowing rate for the company when calculating the NCF
@streetgold said:
Just wanted to ask, do i need to plus the 40 basis??? i didnt add it because the question say the maximum interest will only go over 5 and minimum 3.4@ivonne
do you remember anything about the futures hedge?
What effective rate did you get?I think that’s what I got.
Does anyone know the calculation for the 1/4 swaption at 5% was?!!?
I Hadn’t a breeze what to do on that so just answered with theory hoping for a few marks!
@adolf121, no unfortunately as I was in such a rush when working on question 4:-(.. the only thing I remember is for increasing base rate scenario, my EIR for both future and option is more than 5%, and EIR of future is higher than that of option; for decreasing base rate scenario, my EIR of future is 2.xx%, and EIR of option is 4.xx%.
@adolf121 said:
@ivonne
do you remember anything about the futures hedge?
What effective rate did you get?I think the swaptions wanted us to explain what 1 X 4 meant and then show the effective rate achievable.
Since hickamore can and usually does borrow at L+.40
They will receive L
Pay 5%
giving an effective rate of 5.40%Im not quite sure about this tho.
@elaine, totally skipped this sub-question due to out of time:-( do you by any chance remember the marks assigned to this sub-question of swap?
@unnysnowflakes said:
I think that’s what I got.Does anyone know the calculation for the 1/4 swaption at 5% was?!!?
I Hadn’t a breeze what to do on that so just answered with theory hoping for a few marks!
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