Hi,
I am really struggling to get to grips with real options, and I am confused with the solution to the asset price of the Jigu Project. The cost of the project and the npv have been added together and discounted. I don't understand why the cost is added to the npv (as it's a cost so why do we add it on?) and why we discount the npv down again as it's already been discounted?
Thanks!
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AFM March/June 2019 2bii) Asset Price of Jigu Project
5y ago#1Pa is the PV of the future flows from the project.
The NPV at the start of the project (so in 4 years time) is $10,000,000. This the PV of the future flows less the initial cost of $60,000,000. So the PV of the future flows must be $70,000,000.
(The NPV is 70 - 60 = $10M)
However this is the PV in 4 years time, but we need to PV 'now'. So we discount the $70M for 4 years.
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