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Sir,
In this question i have calculated NPV (without option) after including $12m into total investment as it is part of project cost and this gave me npv of $0.76m.
Value of option after including $12m in P(e)= exercise price and Using Black and scholes model i got C= $9.40m
Here i want to know whether my way calculation is correct or not because examiner result are different from my result as examiner didn’t include $12m in NPV Calculation (without option) and Value of call option calculation (with option) ????
Where are you finding this question?
I am asking because in the original exam question there is no $12M anywhere!!
They spend $7M at the start of the next 2 years to develop the game, and then spend $35M at the start of the 4 year sales period (although it is this that they have the option on).
Sir I have found this question in kaplan kit question no 43 MMC ( JUN 11 ADAPTED)
Sir you are right, in original exam question it was said that “MMC spend $7M at the start of the next 2 years to develop the game, and then spend $35M at the start of the 4 year sales period”
But in kaplan kit it was said that, “MMC will spend $12m immediately to develop the game, the gaming platform and to pay for the exclusive rights to develop and sell the game ”
there are some other changes standard deviation= 50%, Risk free rate =5%
I m sry i didn’t see the original question before i ask you my question…..
so now will you be able to solve this problem of mine ????
I just only want to know whether i can include $12m in investment when calculating NPV and Option price using black and scholes (meaning, in NPV calculation : Year 0 = investment $47m and in value of option (BSOP) calculation : P(e)= $47m). I have no other confusion and will be able to do the rest.
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