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Submitted to : Prof. Jasbeer Singh Matharu
Piyush Chandak 2015208
Irinia Ranjan 2015215
Kriti Jain 2015216
Priyanka Mishra...
Matharu
of the option to
estment
1 Project's present value will drop by roughly 1/n each year into the project
2 Riskfree rate is assumed as 7% that is equ...
VALUING AN OPTION TO ABANDON A PROJECT
Table 1 : Input Data related to Net Present Value of the Project
Initial investment...
ECT
in million Rs.
in million Rs.
in years
in million Rs.
in %
in years
in million Rs.
in years
in %
sury Bond Rate 0.00%
...
VALUING AN OPTION TO ABANDON A PROJECT
Table 1 : Input Data related to Net Present Value of the Project
Initial investment...
Value of Option to Abandon = $14.89
ECT
in million Rs.
in million Rs.
in years
in million Rs.
in %
in years
in million Rs.
in years
in %
sury Bond Rate 7.00%
...
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A mdel to estimate the value of the option to abandon a project or investment Slide 1 A mdel to estimate the value of the option to abandon a project or investment Slide 2 A mdel to estimate the value of the option to abandon a project or investment Slide 3 A mdel to estimate the value of the option to abandon a project or investment Slide 4 A mdel to estimate the value of the option to abandon a project or investment Slide 5 A mdel to estimate the value of the option to abandon a project or investment Slide 6 A mdel to estimate the value of the option to abandon a project or investment Slide 7 A mdel to estimate the value of the option to abandon a project or investment Slide 8
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A mdel to estimate the value of the option to abandon a project or investment

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This an excel model created to value an option necessary to be taken in order to abandon a project or an investment

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A mdel to estimate the value of the option to abandon a project or investment

  1. 1. Submitted to : Prof. Jasbeer Singh Matharu Piyush Chandak 2015208 Irinia Ranjan 2015215 Kriti Jain 2015216 Priyanka Mishra 2015229 Anju Prajapati 2015132 Sr. No. Content 1 Documentation 2 Assumptions 3 Model 4 Example of the Model A model to estimate the value of the option to abandon a project or investment Group-10
  2. 2. Matharu of the option to estment
  3. 3. 1 Project's present value will drop by roughly 1/n each year into the project 2 Riskfree rate is assumed as 7% that is equal to Treasury bond rate 3 Time of abandonment is considered as time of option life 4 Tenue of the project more than 10 years should not be considered ASSUMPTIONS
  4. 4. VALUING AN OPTION TO ABANDON A PROJECT Table 1 : Input Data related to Net Present Value of the Project Initial investment in the project Expected cash flow each year Tenure of the project Discount rate Table 2: Calculation of Present Value of the Project Year Cash Flow 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 0 10 0 PV of investment 0 Table 3: Inputs relating the underlying asset Present value of cash flows from project 0 Variance in Underlying Assets's Value Annualized standard deviation in ln(present value of CF) 0.00% Remaining life of the project Salvage Value on abandonment Time to expiration Enter the riskless rate that corresponds to the option lifetime = Output relating to long term option Table 4: VALUING A LONG TERM OPTION Stock Price 0.00 Treasury Bond Rate Strike Price 0.00 Variance Expiration (in years) 0 Annualized dividend yield d1 = N(d1) = d2 = N(d2) = Value of Option to Abandon =
  5. 5. ECT in million Rs. in million Rs. in years in million Rs. in % in years in million Rs. in years in % sury Bond Rate 0.00% 0 ualized dividend yield
  6. 6. VALUING AN OPTION TO ABANDON A PROJECT Table 1 : Input Data related to Net Present Value of the Project Initial investment in the project 100 Expected cash flow each year 45 Tenure of the project 10 Discount rate 12% Table 2: Calculation of Present Value of the Project Year Cash Flow 0 -100 1 45 2 45 3 45 4 45 5 45 6 45 7 45 8 45 9 45 10 45 PV of investment 254 Table 3: Inputs relating the underlying asset Present value of cash flows from project 254 Variance in Underlying Assets's Value 0.09 Annualized standard deviation in ln(present value of CF) 30.00% Remaining life of the project 10 Salvage Value on abandonment 150.00 Time to expiration 5 Enter the riskless rate that corresponds to the option lifetime = 7.00% Output relating to long term option Table 4: VALUING A LONG TERM OPTION Stock Price 254.26 Treasury Bond Rate Strike Price 150.00 Variance Expiration (in years) 5 Annualized dividend yield d1 = 0.898485228 N(d1) = 0.815536542 d2 = 0.227664835 N(d2) = 0.590046594 Considering that a company XYZ Ltd. is considering a 10-years project which requires an initial investment of Rs. 100 million i the project from the project is Rs. 45 million. The company has the option to abandon this project anytime by selling its share 150 million. A simulation of the cash flows on the time share investment yields a variance in the present value of the cash flo discount rate is 12%.
  7. 7. Value of Option to Abandon = $14.89
  8. 8. ECT in million Rs. in million Rs. in years in million Rs. in % in years in million Rs. in years in % sury Bond Rate 7.00% 0.09 ualized dividend yield 10.00% investment of Rs. 100 million in a real estate firm. The expected cash flow from ject anytime by selling its share back to the developer in the next 5 years for Rs. e present value of the cash flows from being in the partnership is 0.09. The

This an excel model created to value an option necessary to be taken in order to abandon a project or an investment

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