Talam Co (June 2019)

Hi John,
The final assessment for Talam Co problem as per the suggested answer is:

The value of the Uwa Project based on just the initial NPV is a small negative amount of $(6,000) approximately (appendix 1).This would indicate that the project is not worth pursuing, although the result is very marginal. The offer from Honua Co, and the Jigu Project, using the real options method, gives an estimated value of $17,668,000 (appendix 2), which is positive and substantial. This indicates that the Uwa Project should be undertaken.

My question:
1. Shouldn’t the decision to accept be made based on value of real options + NPV of the project until year 2 ?(The real option is to sell from Year 3 and alternative use after sale).
2. If the NPV of project until year 2 is considered, the value of the project including the options would be (17,668,000 + negative 36.45 million) causing us to decide not to accept the project.

Thanks!