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Real Options Pa and Pe values

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Real Options Pa and Pe values

  • This topic has 1 reply, 2 voices, and was last updated 9 years ago by AvatarJohn Moffat.
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  • May 16, 2016 at 9:21 am #315294
    Avatarhisham503
    Participant
    • Topics: 35
    • Replies: 55
    • ☆☆

    Please tell me whether my understanding is correct regarding Pa and Pe

    1-Abandon(Put option) option Pa is the value which will be lost by selling the project earlier and Pe is the value we received by selling.

    2-Delay option(Call option)
    Pa is the p.v of the project
    Pe is the capital expenditure that can delayed.

    3-Expansion option.
    Pe is the amount of cost needed for expansion. It
    but what is the Pa in expansion? and expansion is like call option?

    Please mention any error i made in 1 and 2 and explain 3.

    May 16, 2016 at 9:37 pm #315361
    AvatarJohn Moffat
    Keymaster
    • Topics: 57
    • Replies: 54845
    • ☆☆☆☆☆

    1 and 2 are correct.

    For 3 , Pa is the PV of the additional flows due to the expansion

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