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attitudes towards risk and judgment on information available, but is determined by themarket. Bode-Greuel (2000) argues that the risk-neutral principle is particularlyimportant for projects that involve major proportions of the R&D since R&D budge isdiversified over a large number of projects in large companies. Therefore, valuederived from the real options analysis is consistent with a project‘s contribution toshareholder value creation.The figures below demonstrate the differences among DCF, decision trees and realoption valuation with respect to their contribution to decision making.Figure 2.1: Comparison of three project valuation methods using decision trees(Source: Bode-Greuel K. 2000)Page | 16
Figure 2.2: Advantages and disadvantages of the three methods that use decision trees fordynamic cash flow analysis(Source: Bode-Greuel K. 2000)2.3 Option Pricing Theory2.3.1 Fundamentals: call, putCall option - the right to acquire an asset at some future time for a cost which isknow n now , how ever m uch the asset‘s m arket value m ay change m eanw hile.Put option - the right to sell an asset in future, at a price known now, whatever itsmarket selling price may be at that time.European option - option which gives the right to invest (or to sell out) on only onefixed future date.American option - option which gives us the right to invest (or to sell) at any time wechoose, usually up to some fixed final date.In the money- the situation when the current value of the underlying asset is higherPage | 17
Page 1 and 2: APPLICATION OF REAL OPTIONS VALUATI
Page 3 and 4: Table of ContentsAbstract .........
Page 5 and 6: List of TablesTable 5.1: Value of O
Page 7 and 8: Chapter One— IntroductionAs one o
Page 9 and 10: Then, in Chapter 4, the case study
Page 11 and 12: and we will have the right to take
Page 13 and 14: project, to get its salvage value,
Page 15 and 16: The option to switch:If assets have
Page 17 and 18: 2.2 Advantages of Real Option Valua
Page 19 and 20: In the case of pharmaceutical R&D,
Page 21: delayed in time. Undertaking one pr
Page 25 and 26: smallest possible payoff of zero, w
Page 27 and 28: options applications is the binomia
Page 29 and 30: t: years to expirationr: annual ris
Page 31 and 32: Chapter Three— Apply Real options
Page 33 and 34: on Howell et al (2001).3.1.1 Precli
Page 35 and 36: approved.3.2 real options valuation
Page 37 and 38: Figure 3.3: Comparison of a call op
Page 39 and 40: applying the principals of activity
Page 41 and 42: that has occurred in the past. Depe
Page 43 and 44: Chapter Four— Case StudyFor this
Page 45 and 46: 4.3 DavanrikLAB Pharmaceuticals ori
Page 47 and 48: efficacious for depression only, a
Page 49 and 50: Chapter Five— Case Study Analysis
Page 51 and 52: figure below:Figure 5.3: NPV of Dav
Page 53 and 54: Merck & Co (10%), which gives $2338
Page 55 and 56: approval and other issues. Therefor
Page 57 and 58: of $345m at year 0 (which is $672.3
Page 59 and 60: project turns out to be unprofitabl
Page 61 and 62: these three options, the risk-free
Page 63 and 64: ewrite as, noting all the costs (in
Page 65 and 66: Figure 5.10: Valuation of Option A
Page 67 and 68: Figure 5.12: Valuation of Option A
Page 69 and 70: Figure 5.13 Valuation of Compound r
Page 71 and 72: $ in millionmillion to $113.97 mill
Page 73 and 74:
Chapter Six— Limitations and conc
Page 75 and 76:
discovery projects, arrives in a di
Page 77 and 78:
References1. Amram M & Kulatilaka N
Page 79 and 80:
31/08/2006, available at: http://ho
Page 81 and 82:
46. T rigeorgis L . (1995), ―M et
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