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Hi,
Could you please clarify, having project with option to delay, abandon, step out etc. we calculate these options using B&S model. But then should we add the B&S result to the NPV of the project? This way we are getting value of option plus value of the future cash inflows of the project, correct? It is confusing since sometimes we add those, sometimes we go with B&S result alone. Could you please comment.
Thanks
You should. Some answer are a bit confusing, but having an option to delay etc. makes the project more ‘valuable’ than it otherwise would be.
The NPV (ignoring the option) is the benefit if an option did not exist. The figure from B&S is the value of the option itself. So the overall benefit of the project with the option is the two added together.
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