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Hello Sir,
Its part A of this question in the solution very first paragraph. He says conventional investment appraisal techniques such as NPV often do not capture the full strategic benefits of a project either in terms of features of a project that allow risk to be managed.
I was trying to interpret this statement in P5 style and was struggling to get it in a P4 context and was overwprked. Can I get your interpretation on this statement in P4 style so that i can contrast it with mine. Will appreciate sir thanks.What you have typed from the answer needs to be taken with the paragraphs that follow on from it.
Conventional NPV’s just look at the estimated flows from the project, but ignore the fact that as the project is progressing, further choices may exist – such as abandoning the project if things look bad, or expanding the project if things look good.
That is why it would make sense for them to build in clauses to the contract that allow them to change when they find out how well or badly things are going, and also why (and this is obviously specific to P4) they should put values on whatever options are available to them in the future.
In this question no calculations were required, but the valuing of options to abandon or expand or redeploy is an important part of the P4 syllabus.
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