Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Using real option
- This topic has 1 reply, 2 voices, and was last updated 4 years ago by John Moffat.
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- July 17, 2019 at 8:27 am #523947
Hello Sir, for the technical article above,the example using by the tutor
for six independent projectsWhy Project W being added to the total value of the option? as although the value of the option is positive, the overall Total Npv of the project is negative for project W .(NPV is -3m and option value is 1.8m) which should be removed and reject the project.
Extract:
“These option values total to a value of $30.5m. If the NPV of project U, which has already been accepted, is added to this a total value of $35.5m is created. This value is significantly higher than the original NPV of $8m which could have been generated by accepting projects U and V. However, careful management is necessary if as much value as possible is to be generated.”“Project W:
This project is not at all promising. It has a negative NPV if exercised now and, as it has a low volatility and there is a relatively short time until a decision has to be made regarding this project, it has a low option value. Hence, this project will probably never be worth exercising. This project could be thought of as the small, late developing fruit which is unlikely to ripen before the season ends.”Thank you.
July 17, 2019 at 2:08 pm #524039The first of the two extracts is badly worded. Project W is not worthwhile with or without the options as you yourself have written 🙂
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