Project delay real option and exercise price

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

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October 25, 2016 at 10:55 am #345947
trendline
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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
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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 🙂
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