papasita what your missing is that at t0 the r&d should be valued, but at tX it is now sunk cost and is not considered hence net PRESENT value. N/Y
Know too much for the CFA, sounds too stupid to be arrogant.
Black Swanyou sound upset:) chill friend, or you tried ZMA already:) You can call me stupid, arrogant…I don’t care…I don’t need e-viagra, I got ZMA:) hehe You actually made me open my books again; I will not advertise the book, but it is considered the top of the bookshelf on real options:) “A more realistic case is one in which learning about expected future cash flows required actual investment in the venture but investment can be staged. Assume…that a pilot projectcan be started at cost of $5 and an additional $35 would be required …to generate FCF…next year onward”. I don’t remember clearly now but I think vignette did say pilot. Again, I completely understand that my answer was wrong and why it was wrong, and why you got it right… I misread the vignette and the question…
Black Swan Wrote: ------------------------------------------------------- > papasita what your missing is that at t0 the r&d > should be valued, but at tX it is now sunk cost > and is not considered hence net PRESENT value. N/Y Black Swan, this is not what I’ve read, if that is the case then once again you got it right. Good luck to all of us
Black Swan Wrote: ------------------------------------------------------- > Know too much for the CFA, sounds too stupid to be > arrogant. yes, you got it right. now you can stone me to death, fellow CFA charter seeker. I did not say I know too much for CFA, I know too little. By the way I said in this (real option) area…those 10 pages or so on real options were a complete joke, in my opinion. it was not even enough to get a taste of fascinating world of real option.
sorry, I get a little excitable, kudos on staying cool. And I agree with you on real options (yes) I think and I believe I proved that it should be considered earlier in the thread, its the r&d I was debating (saying no).
well, I clearly remember they tested the concept of sunk cost on level 1. why again on level 2? => guess they decided to make easier this year for people to pass L2:) to get screwed on L3; that with AM quant section were level 1 “easy” question
Guys, just to wrap this up. I am sure and remember this was definitely a trick question, I went for n/n for this bcoz the whole question was related to the first project npv they discussed in detail with npv etc. I thought the second prototype with a delay option was not related to the first project. So the delay option on prototype had nothing to do with the project npv in question… Any one agree with me?
guys it was n/n
born2b Wrote: ------------------------------------------------------- > Guys, > > just to wrap this up. I am sure and remember this > was definitely a trick question, > > I went for n/n for this bcoz the whole question > was related to the first project npv they > discussed in detail with npv etc. I thought the > second prototype with a delay option was not > related to the first project. > > So the delay option on prototype had nothing to do > with the project npv in question… > > Any one agree with me? I agree with you but I see the point of others posting as well. Unless we know the exact wording of the question we will never be certain. I went n/n so I hope you’re right 
I remeber the location of that question on the page: top left corner (seriously). anyone with photographic memory to complete the picture:)?
its n/y read my large posts above it is conclusive even slouiscar gave in.
Black Swan Wrote: ------------------------------------------------------- > its n/y read my large posts above it is conclusive > even slouiscar gave in. Nice…got one for the gipper.
I don’t remember the question saying the delay was optional, it was a possibility. Big difference. An option increases NPV. A forced delay on a positive NPV project reduces NPV. So if there is a probability of delay, that would reduce NPV. Clearly N,Y on this one.
Hmm… whether it was optional or not creates quite a difference as in this case… I don’t remember what the exact wording was… I answered it as N,Y… but I thought I was wrong since during discussions on the forum it was mentioned that since NPV > 0 the option of delay did not need to be considered. Does anyone remember if the question said it was an option or whether it said that it was a possibility?
so you want CFAI explicitly tell you it was an option and then ask you a question if it was the option? com’n man, it is level 2 not some fairy tale. ^Does anyone remember if the question said it was an option or whether it said that it was a possibility? those are the same thing and translation is “real option”
that is the point of the discussion here… was the delay an option at all or not (a possibility could mean an option only if its in your control, otherwise its not an option)… and to determine that, one has to remember the exact wording of the question … which is what I don’t remember and was asking… After this explanation, I’m sure there is no “possibility” of you being confused anymore though you still have the option.
what to you mean in control and not in control. I have difficulties imagining possibility and being not in control if you can delay and make a decision based on certain outcome…who else has a control to delay and consequently expand the project, I am confused I thought Dwight got it right, for 5050: “Management is considering delaying the project until next year to have the results from the test market sales of the prototype.” adb, sorry Iif I came across as rude. long day…
Per previous exhausting conversation, Management wasn’t considering a delay at all, it was forced upon them by unfavorable market conditions. The delay has already occurred and there is no option remaining. The delay has undoubtedly changed the cash flow structure of this project and it has reduced NPV. Therefore, it must be considered.
Mcleod, the way you put it is different from what I’ve read. but if so then you are correct. However, I clearly remember that vignette said nothing about “unfavorable market conditions”, and “management was deciding”…so clearly they were in control not “the conditions”. I guess we will never recreate this vignette and/or questions…without people who took ritalin for exam:) their brain retained most of it