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In the answer for q4, it states that the pa(current price for project) is = all of the +npv generated
& exercise price (pe) is equal to the production,marketing and distribution costs ie $35m
Please explain .
thanks 🙂Whatever happens, the company will spend 7M in each of the next two years to develop the game. Since this will happen whether or not we delay, we can ignore this.
The option (per the question) is the option to delay paying the 35M for the production, distributing and marketing costs.
So…..35M is the exercise price – that is what we will have to pay if we do go ahead.
The value now (so Pa) is the PV of the returns we expect to get (but it is this that might have changed in two year, which is why the option to delay spending the 35M has a value).
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