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Hello Sir,
Am unable to derive at Pa for the Honua Co offer under the real options. Would be pleased to know how to derive at the value of the Honua Co offer under the real options BSOP.
Thanks in AdvancePa is value of the investment, which is the present value of the cash flows from Jigu.
The NPV is given in the question as being $10M. This is the PV of the cash flows less the initial investment of $60M. So the PV of the cash flows must be $70M.
However this is the PV at the start of the project in 4 years time, and therefore the PV ‘now’ is $70M discounted for 4 years at 11%.
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Thank you so much for the response Sir
I would also like to know how to determine the asset value of Honua Co offer?From the answer key:
Asset value (Pa) = $16,959,000 + $19,488,000 = $36,447,000 (cash flows foregone)Sorry, I realise now that I wasn’t answering what you were actually asking 🙁
The offer is to buy the Uwa project at the start of the 3rd year of the projects life.
The PV’s of the flows at the end of the 3rd and 4th years are (from the first bit of workings in the appendix) 16,959,000 and 19,488,000. So they are the PV’s that will be lost if they sell to Honua.
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Thank you for clarification sir.
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