When considering delaying the start of a project, we recalculate Pa, the PV of the cash flows, by using adjusted discount factors to reflect the fact that they are now further in the future. However it seems like we don't change the value of Pe, the capital investment. Would this not also be adjusted to reflect the time value of money?
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Project delay real option and exercise price
9y ago#1We don't change Pe.
The reason is that the rest of the term in the Black Scholes formula (the e^(-rT) ) is doing the discounting :-)
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