application of real options valuation to r&d investments in ...
application of real options valuation to r&d investments in ...
application of real options valuation to r&d investments in ...
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Figure 5.4: Volatility estimation for option from year7 <strong>to</strong> year 17Exercise price – <strong>in</strong> this abandonment option, the exercise price would be the salvagevalue <strong>of</strong> the project, which <strong>in</strong> this case, is assumed <strong>to</strong> be the value <strong>of</strong> the patent. S<strong>in</strong>cethe patent is go<strong>in</strong>g <strong>to</strong> expire <strong>in</strong> year 17, so at year 17, the patent‘s value is 0. And thevalue <strong>of</strong> the patent is decreas<strong>in</strong>g over the period, as the potential buyer <strong>of</strong> the patentwould be will<strong>in</strong>g <strong>to</strong> pay less as the time approach<strong>in</strong>g the expiration <strong>of</strong> the patent. It isalso assumed that the patent is decreas<strong>in</strong>g on a ‗straight l<strong>in</strong>e‘ way, so each year woulddecrease 1/10 <strong>of</strong> its orig<strong>in</strong>al value.Risk-free rate – the risk-free rate <strong>of</strong> 4.37% is referred <strong>to</strong> the US Ten-Year Treasuryon the 3 January 2006, which will expire <strong>in</strong> 2016 (T). The chosen <strong>of</strong> this particularTreasury is <strong>to</strong> correspond <strong>to</strong> the expiration <strong>of</strong> the option.5.2.2 Valuation <strong>of</strong> the abandonment option (Option B)It is assumed here, if the compound has successfully passed all the three phases, thepossibility for the compound <strong>to</strong> enter<strong>in</strong>g the market is 100%, regardless <strong>of</strong> the FDAPage | 48