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Company X is considering an investment in a joint venture to develop high quality office blocks to be let out to blue chip corporate clients. This project has a thirty year life, and is expected to cost Company X £90m and to generate and NPV of £10m. The project manager has argued that this understates the true value of the project because the NPV of £10m ignores the option sell Company X’s share in the project back to its partner for £40m at any time during the first 10 years of the project. The standard deviation is 45%p.a., and the risk free rate is 5%p.a.
Evaluate the value of option.
How to identify it is a put option from this question?? Also why is £40m taken as Pe??
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