Dear Sir,
I do not understand why NPV of investment B (without considering the offer from Kero) is 29m ?
I think it should be total PV of year 1-4 + PV of year 5-25 - initial investment = 8.25+26.37-34.6 = 0.03
What is the meaning of calculation of total NPV for 2 cases : with and without considering the offer from Kero : 29K+4.3m = 4.359 m ?
Please help me to explain.
Thank you.
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Sep 22 Q1.b.ii - NPV
3y ago#1The NPV is 1250 + 1563 + 1953 + 3488 + 26375 - 34600 = 29
However all of those flows are stated in $000's, so the NPV of 29 is actually 29,000 :-)
Thank you, I understand.
Pleas help me to answer the 2nd question :
What is the meaning of calculation of total NPV for 2 cases : with and without considering the offer from Kero : 29K+4.3m = 4.359 m ?
3y ago#3If the offer from Kero is ignored, then the NPV is 29(as per my previous reply).
The offer from Kero is only a possible offer (and is a put option). Using the BSOP model the value of this real option comes out as 4,330. The existence of the option makes B more attractive and so the NPV is the total of the two.
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