Question 1 - Set up

In this lesson

1. 0:00 AFM Practice Exam One Debrief
2. 0:49 Understanding Real Options in Investment Appraisal
3. 3:19 Talam Company Overview and Project Context
4. 4:01 The Ather Project and Jeju Follow-On Option
5. 5:00 Ather Project Financial Data and Assumptions
6. 7:51 Honu Offer and Abandonment Option
7. 8:14 Jeju Project Real Options Valuation Inputs
8. 10:32 Biodegradable Drones Ethical and Sustainability Issues
9. 11:00 Exam Strategy and Marks Allocation

About this lesson

You'll discover how to extract and prioritise requirements, identify the key techniques needed (net present value and real options), and manage your time effectively across discussion, calculations, and written analysis. The question centres on Talam, a listed engineering company considering the Otero project to manufacture biodegradable drones. You'll work through detailed financial data including volume, pricing, variable and fixed costs with inflation, working capital requirements, and capital investment of 35 million. The scenario also introduces two real options: the Jeju project as a follow-on investment opportunity and the Honu offer to abandon the project at year three for 30 million. Understanding how these options interact with the core NPV calculation is essential for maximising marks. The debrief walks you through the five-part requirement structure. Part A asks you to discuss the advantages of real options in investment appraisal. Part B requires a professional report calculating the NPV of the Otero project, then valuing both the Jeju project (using the Black-Scholes option pricing model) and the Honu abandonment option. Part C demands evaluation of assumptions and calculations. Finally, part D addresses sustainability and ethical issues around biodegradable drones and production in countries with questionable labour practices, asking you to propose solutions. Key takeaways: prioritise the NPV calculation as your main scoring opportunity, keep the three projects separate, watch for inflation and working capital movements, and don't neglect the written sections even if time is tight. This structured approach transforms a complex, multi-layered question into manageable parts.

Duration: 16m