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P4 June 2010 Q4 : Option to delay

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › P4 June 2010 Q4 : Option to delay

  • This topic has 1 reply, 2 voices, and was last updated 13 years ago by John Moffat.
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  • May 30, 2012 at 12:43 am #52961
    tropicallove
    Member
    • Topics: 2
    • Replies: 5
    • ☆

    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 🙂

    May 30, 2012 at 7:01 pm #98827
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54682
    • ☆☆☆☆☆

    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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