Hello. It's quite difficult for me to identify Pa and Pe values in questions.
In the MMC question from BPP Revision Kit, I used the present value of cash flows from the project as Pa. But in another question (Furlion) I knew the present value of cash flows from the project, but I had to undo the discounting. I had to use the cash flow value (not its present value) a Pa. I don't understand why this is.
MCC : Pa = 38.75
Furlion : Pa = 10.68
Any guidelines on how to identify these values from questions? Also, why was Pa different for these two questions (one discounted, other one not discounted)
Question regarding Black Scholes
6y ago#1In Furlion, the question says that the expected NPV of the expansion is $0.
Since the expansion will involve expenditure of $15M in 3 years time, then the PV of the cash receipts from the expansion must also equal $15M in 3 years time (so that the NPV is zero).
Pa is the PV 'now' and so the $15M needs to be discounted for 3 years, which gives $10.68M
Alright. Another question popped into my head.
Shouldn't Pe, which is 15 also be discounted since its happening after 3 years?
6y ago#3No.
As I explain in my free lectures, the last term in the Black Scholes equation (the one with Pe and 'e' in it) is effectively discounting Pe on a continuous basis (instead of year by year as we usually do elsewhere). So we don't need to discount it again :-)