Digunder (12/07)

Sir in a real option to delay, the exercise price is the investment amount we are delaying and the underlying value of the asset (Pa for the B-S formula) is the PV of the cash flows from the project being delayed.
This is the case normally and then we add/subtract the value of the option to/from the NPV of the project to get the value of the project.

However in this question we are not given the building costs for the housing development project but $4m it’s NPV (“Property sales less Building Costs”) and we are given the cost of acquiring the land $24m, for Pa we add up $24m and $4m and then for Pe again we use $24m, where’s the logic in this?