Question 1 - Part b (iii)

In this lesson

1. 0:00 Evaluating the project and real options
2. 1:06 Calculating strategic net present value
3. 3:03 Interpreting results for the board
4. 4:02 Assessing follow-on projects and offers
5. 5:06 Key assumptions and limitations to consider

About this lesson

This is a crucial skill for Advanced Financial Management (AFM), where examiners expect you to move beyond basic calculations and demonstrate critical thinking about investment decisions. The video walks you through pulling together your numbers to reach a conclusion. You'll see how an initially negative NPV can become strategically positive when you factor in call and put option values—in this case, moving from a negative £22,046 to a positive £0.7 million. The tutor shows you how to explain what these figures mean to the board, using the specific scenario details rather than generic statements. You'll also discover the importance of identifying and articulating your assumptions and reservations. The video highlights key limitations such as the high standard deviation of the project (50%), the appropriateness of the Black-Scholes model for one-off projects, whether the cost of capital reflects the right company risk, and whether assuming a constant cost of capital over four years is realistic. These aren't just technical points—they're marks available to you even if calculations prove tricky. By the end, you'll understand how to construct a balanced, evidence-based conclusion that demonstrates examiner-level thinking and helps you secure valuable marks on AFM case study questions.

Duration: 8m