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Real Options

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Real Options

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.
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  • Author
    Posts
  • February 10, 2021 at 12:39 pm #609921
    Noah098
    Member
    • Topics: 935
    • Replies: 352
    • ☆☆☆☆☆

    Sir in case of
    1)Option to delay we-compare: NPV Vs. Value of option
    2)in case of Option to expand or follow on: NPV+Value of Option

    These two am not sure:

    3)in case of option to abandon: NPV +Value of option
    4)in case of option to switch or redeploy: absolutely no idea.

    Sir could you guide me with right approach in the remains two, apart from confirming the first two.

    Many thanks as always!

    February 10, 2021 at 2:31 pm #609932
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51538
    • ☆☆☆☆☆

    In 1, it is not that we compare anything.
    The result of the BS formula is the NPV including the value of the option. Therefore the value of the option is the NPV including the value less the NPV without the option.

    For 2, 3, and 4, the result of the BS formula is the value of the option. So the NPV with the option is the NPV without the option plus the value of the option.

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