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Hello Mr Moffat,
Sir, when we calculating the Real option of lets say abandoning a project, we use put option using Black Scholes Option Pricing Model to value it, i did some several questions and i saw they added with the NPV of the project to assess whether its worthwhile to undertake a project. I didn’t understand the logic of why they added the real option with the NPV of a project, kindly explain.
Thanks
The NPV is the value of the project ignoring any option to abandon (or any other option for that matter).
If there is an option then the option makes the project more valuable and so the overall value is the NPV plus the value of the option.Dear sir,
I also have question about real options. As we plus the value of real option to traditional NPV, is this combined NPV used to select project or it is just a mean to account the uncertainty? For example: Project A has traditional NPV = 0, plus NPV of real option = 3. Project B has traditional NPV = 2, without any real option.
If combined NPV is used for appraisal, is it actually the wealth brought back to investor?
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