Question 1 - Part b (ii)

In this lesson

1. 0:00 Real options calculations overview
2. 0:15 GPU project asset valuation setup
3. 1:10 Understanding cash flows and NPV components
4. 3:07 Calculating present value at T4
5. 4:21 Discounting back to present value
6. 6:09 Honu offer and abandonment option
7. 7:29 Black-Scholes inputs for put option
8. 9:36 Calculating foregone cash flows
9. 11:36 Applying Black-Scholes model

About this lesson

This is a stretching but essential technique for AFM and SBL, where real options thinking separates strong candidates from the rest. The first part walks you through the GPU project, where you'll work backwards from given figures—net present value of 10 million and a required investment of 60 million at year 4—to calculate the present value of future cash flows. You'll use basic algebra and discounting to prove that the asset value of 46.1 million is correct. This demonstrates how to extract missing information from financial data, a skill that earns marks even when the numbers feel unfamiliar. The second part covers the Honu offer, which is a real option to abandon the UWA project at the start of year 3. Here you'll identify that an abandonment option is a put option, then gather the five inputs needed for Black-Scholes: the risk-free rate, volatility (using the correct standard deviation), time to exercise, the present value of future cash flows being sacrificed, and the abandonment proceeds. You'll then input these into the Black-Scholes calculator to derive the put option value. This is exactly the type of multi-step real options problem that appears in AFM case studies and SBL scenarios.

Duration: 14m