Black-Scholes Abandon Project
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Transcript of Black-Scholes Abandon Project
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7/29/2019 Black-Scholes Abandon Project
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Extraction Cost 0.85 Rs. At beginning of extraction phase. (One year after development phase is i
Current Spot Price 0.95 per Kg. Change in the price of coppar is 7% and Standard Deviation is 2
Required Rate of return is 10% and riskless rate is 5%.
NPV Analysis
Initial Cost -1.25
Quantity 8 million Kg
S0 0.95 per KG
Price change 7%
Required Rate of Return 10%
Extraction Cost 0.85 per KG
OutPut data
Expected Price of Coppar in 1 year
S1 1.01888
Outflow -1.25
Inflow 1.22824
Expected NPV -0.02176
Decision
Project is Rejected Because of Negative Expected NPV
A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs. Of cost for one year
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itiated). Sale of coppar would be at spot price as of coppar as of beginning of extraction phase.
% per annum.
Black-Scholes Model:
I nput Data
Stock Price now (P) 7.6
Exercise Price of Option (EX) 6.8
Number of periods to Exercise in years (t) 1
Compounded Risk-Free Interest Rate (rf) 5.00%
Standard Deviation (annualized s) 20.00%
Output Data
Present Value of Exercise Price (PV(EX)) 6.4684 ,=K*e^(-rt)
s*t^.5 0.2000 ,=Std. * t^1/2
d1 0.9061
d2 0.7061
Delta N(d1) Normal Cumulative Density Function 0.8176
Bank Loan N(d2)*PV(EX) 4.9156
Value of Call 1.2979
Value of Put 0.1663
Decision
Option Adjusted Present value 0.0479
Accept Project because of Positive Expected NPV
of development immidietely.
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Extraction Cost 0.85 Rs. At beginning of extraction phase. (One year after development phase is i
Current Spot Price 0.95 per Kg. Change in the price of coppar is 7% and Standard Deviation is 2
Required Rate of return is 10% and riskless rate is 5%.
NPV Analysis
Initial Cost -1.25
Quantity 8 million Kg
S0 0.95 per KG
Price change 7%
Required Rate of Return 10%
Extraction Cost 0.85 per KG
OutPut data
Expected Price of Coppar in 1 year
S1 1.01888
Outflow -1.25
Inflow 1.22824
Expected NPV -0.02176
Decision
Project is Rejected Because of Negative Expected NPV
A Company has 8 million Kg of Coppar. Mining will include 1.25 million Rs. Of cost for one year
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itiated). Sale of coppar would be at spot price as of coppar as of beginning of extraction phase.
% per annum.
Black-Scholes Model:
I nput Data
Stock Price now (P) 7.6
Exercise Price of Option (EX) 6.8
Number of periods to Exercise in years (t) 1
Compounded Risk-Free Interest Rate (rf) 5.00%
Standard Deviation (annualized s) 20.00%
Output Data
Present Value of Exercise Price (PV(EX)) 6.4684 ,=K*e^(-rt)
s*t^.5 0.2000 ,=Std. * t^1/2
d1 0.9061
d2 0.7061
Delta N(d1) Normal Cumulative Density Function 0.8176
Bank Loan N(d2)*PV(EX) 4.9156
Value of Call 1.2979
Value of Put 0.1663
Decision
Option Adjusted Present value 0.0479
Accept Project because of Positive Expected NPV
of development immidietely.
