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Could you please help with the following question?
Technical article “INVESTMENT APPRAISAL AND REAL OPTIONS” , example 1 does not add the value of the project before taking into account the real option to the calculation call option value (to find the total value of the project).
Why is this different, compared to Q25 (MMC) in the Practice and Revesion Kit (BPP), which initially calculated the base NPV and then adds to it the Call option value derived from the Black Scholes model?
Thanks a lot,
The technical article is correct.
The answer to MMC is copied from the examiners answer (it was the previous examiner) and it was wrong – the value using Black Scholes is the total value (including the value of the project). The current examiner accepted that it was wrong and amended the technical article accordingly.
Because of the confusion it is unlikely you would lose many if any marks if you had done it the way in MMC. The marks are really for being able to use the formula in the first place.
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