what a bunch of obsessive compulsives we have all become!.cant we all,regardless of out opinion on this, just take a -1 hit and forget about this?. especially since nobody has the vignette in front of them and we’ll not know the official answer until 2010
kabhii Wrote: ------------------------------------------------------- > I do remember for sure that the product already > had positive NPV, infact the number was already > mentioned in the vignette. There was a cost of prototype of $500k, not the whole project. I give up! Way too many versions of the same vignette! 
Black Swan Wrote: ------------------------------------------------------- > the scenarios I laid out > before cover every possible aspect of the wording. > I honestly feel that there is no longer room for > wording issues of any kind. We all agree on the > fact that the project was now going to be delayed. > The issue was over whether it was forced or by > choice. Either way, as I pointed out, excerising > the option indicates a negative or uncertain > present value just prior to excercising the > option, as you would otherwise not delay due to > decreased TVM. This argument is flawed. The management was considering delaying the project to wait on more information (a textbook example of a delay option), so we do not “all agree on the fact that the project was … going to be delayed.” The project already had positive NPV, so it will be accepted = not delayed. They were just considering delaying it so it has an embedded option, which is irrelevant due to the positive NPV. Without the actual question we won’t be able to put this to rest by endless debate.
Black Swan Wrote: ------------------------------------------------------- > Just to clarify, though, sorry spongie, I do feel > bad about that. No worries. I just don’t agree with your assessment that some of your assumptions are “agreed” upon. I don’t necessarily agree, like Dwight, that the project was going to be delayed. I remember it as management was “considering” delaying the project. Thus my point was not that you were wrong/right or I was right/wrong, but that without knowing all the important little details (like whether it was delayed, or that was just being considered) the arguments are going to get you no where. Sadly I can attest that every year there are a few questions that are widely discussed and argued over to no avail.
To add more fuel … What if there was capital resource constraint and other proejcts, then the project under discussion would have its NPV compared with other projects. In that case, just knowing positive NPV is not enough.
buddham Wrote: ------------------------------------------------------- > To add more fuel … > > What if there was capital resource constraint and > other proejcts, then the project under discussion > would have its NPV compared with other projects. > In that case, just knowing positive NPV is not > enough. Well that’s definitely true, but they didn’t have that specified in the question on the exam I took. Might have been that way on a different exam version.
buddham Wrote: ------------------------------------------------------- > To add more fuel … > > What if there was capital resource constraint and > other proejcts, then the project under discussion > would have its NPV compared with other projects. > In that case, just knowing positive NPV is not > enough. I don’t think so that was mentioned in the question. Even if you assume this scenario then there are two possible scenarios: 1. If you have more resource than required for investment in this project then you need to recalculate NPV for ranking. 2. If you don’t have more resource than required for investment in this project then in that case NPV won’t matter.
You are correct, it was not mentioned in the question. Looking at the kind/level of questions, I feel they were not tricking us with this question. I think they just wanted us to differentiate between the sunk cost and a real option. You do not consider the sunk cost in evaluating a project, but you consider any option. People who thought more about it in that NPV was already positive, so real option can only add to it, are correct, but CFAI may not have been thinking that far. Most of the questions were shallow.
buddham Wrote: ------------------------------------------------------- > People who thought more about it in that NPV was > already positive, so real option can only add to > it, are correct, but CFAI may not have been > thinking that far. Most of the questions were > shallow. Agree 100% except for the part about the shallow quesitons. Take for example the inflation passthrough question. You had everything in real terms except you had to adjust the req’d rate of return down by the inflation rate. Talk about a “not-shallow” question! Because you could know the formula perfectly (as I did) and still miss the question (as I did). So the debate comes down to how deeply to read into the question. I am completely satisfied with that conclusion. Either of us could be correct but it comes down to how the graders decide to interpret it.
Here is my response/question about the inflation pass through question in another thread; sorry to duplicate here. You are correct, for this you may have had to do some thinking for sure if you used Schweser. I am not sure if it was better covered in CFAI text. What was the question? Was it asking for tangible or intrinsic P/E? If it is leading intrinsic P/E, should not you do something like (1-b)/(r + (1 - inflation_pass_through_rate)*inflation - g). Assuming 100% dividend payout ratio => b = 0 => Then Intrinsic leading P/E = 1/(r + (1 - inflation_pass_through)*inflation - g). I understand, the formula was for leading P/E 1/(r + (1 - inflation_pass_through_rate)*inflation. But I think this formula was given in Schweser pretty casually without mentioning its assumptions of 100% payout ratio and no growth. If it was for tangible P/E ratio, then 1/(r + (1 - inflation_pass_through)*inflation) is correct.