Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Nente Co (June 2012)
- This topic has 5 replies, 2 voices, and was last updated 3 years ago by John Moffat.
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- November 22, 2020 at 6:49 pm #596086
Dear sir,
Regarding question iii) the percentage gain in value only factored in the value of the option($603586) but not the value of the project itself NPV of ($405000). Why is that so?
November 23, 2020 at 10:18 am #596122$603,586 is the value of the investment with an option to delay, whereas $405,000 is the value of the investment without the option to delay. (So the benefit of having the option is the difference between the two).
To help explain:
Without the option, the NPV is $2,434,000 less the PV of $2,500,000.
With the option, if you look at the Black Scholes equation, it is still basically Pa (2,434,000) less the PV of Pe (2,500,000). As I explain in my lectures on this multiplying Pe by the term with ‘e’ in it is actually doing the discounting of Pe on a continuous basis (i.e. day by day instead of yearly). The other terms in the equation are dealing with the uncertainty etc..
November 23, 2020 at 12:37 pm #596143But i thought the BSOP calculated the value of the real option, then add it up to the value of the project itself (NPV) to get the real value of the project
November 23, 2020 at 3:05 pm #596161No, not in this case (for the reasons I explained).
The previous examiner though the same as you, but the current examiner has accepted that the answer to the question set by the previous examiner was wrong.
Nente was set by the current examiner, and his answer is correct 🙂
November 23, 2020 at 3:13 pm #596146HighFive wrote:But i thought the BSOP calculated the value of the real option, then add it up to the value of the project itself (NPV) to get the real value of the project
A good example would be June 2011 Mesmer Magic Co
The NPV of the project itself is calculated in addition to the Real option value that together forms the true NPV of the project
November 23, 2020 at 4:20 pm #596175There is a difference in that Nente is an option to delay the whole project, whereas Mesmer is an option to abandon (to delay the decision as to whether or not to continue).
Both answers were written by the current examiner and are both correct.
I appreciate it is confusing, but fortunately the examiner also appreciates this and the majority of the marks are always for being able to use the Black Scholes formula and not for the final answer.
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