Project delay real option and exercise price

This topic has 1 reply, 2 voices, and was last updated 9 years ago by John Moffat.

Viewing 2 posts - 1 through 2 (of 2 total)

Author

Posts
October 25, 2016 at 10:55 am #345947
trendline
Member
- Topics: 21
- Replies: 14
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?
October 25, 2016 at 3:45 pm #345985
John Moffat
Keymaster
- Topics: 57
- Replies: 54861
We 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 🙂
Author

Posts

Viewing 2 posts - 1 through 2 (of 2 total)

You must be logged in to reply to this topic.