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

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. Matharu
of the option to
estment

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. 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. 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. 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. Value of Option to Abandon = $14.89

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