Talam 2019 Dec

Appendix 2 (Part (b) (ii): Jigu Project: Asset value Asset value of Jigu Project of $46,100,000 is estimated as present value of future cash flows related to the project: $70,000,000 x 1·11–4, where $70,000,000 = $60,000,000 + $10,000,000. Honua Co offer, initial variables used to calculate the d1, d2, N(d1) and N(d2) figures: Asset value (Pa) = $16,959,000 + $19,488,000 = $36,447,000 (cash flows foregone) Exercise price (Pe) = $30,000,000 Exercise date (t) = 2 years Risk-free rate (r) = 2·30% Volatility (s) = 30% Value of Honua Co offer Value of Honua Co’s offer Call value: $36,447,000 x 0·7821 – $30,000,000 x 0·6387 x e(–0·023 x 2) = $10,205,640 Honua Co’s offer is equivalent to a put option. Put value: $10,205,640 – $36,447,000 + $30,000,000 x e(–0·023 x 2) = $2,409,899 Estimated total value arising from the two real options Value of Jigu Project: $15,258,399 Value of Honua Co’s offer: $2,409,899 Estimated total value from the two real options: $2,409,899 + $15,258,399 = $17,668,298 Question )) 1. Jingu projects asset value : what is the meaning of the asset value. 70M is the pv of ( cash inflow) in 4 years. Asset value means NPV+ Initial cash outlay ? 2. Estimated total value arising from the two real options Value of Jigu Project: $15,258,399 I have no clue how to produce this figure. I found it difficult regarding part b (II) genenrally. pls help me.