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y using the formula S.D. (yearly) = S.D / Square root of number of years. Asillustrated in the table below, the standard deviation is as high as 95.45%.Figure 5.8: Volatility of Option A (Year 0-7)However, the use of these Probabilities of Technical Success (PTS) is not for options.According to Mun (2005), these PTS should be modeled in the DCF and can besimulated as well. These PTSs can be assumed to be statistically independent of eachother and can be multiplied with one another, or a correlation can be set among them.By simulating the model and use the resulting NPV as the expected value of theproject, after accounting for these PTS events, and then simulating the model againwithout these PTSs changing, the volatility can be captured. This volatility cancapture the uncertainties in the market events that determine what options will beexecuted. Due to time constraints, however, this method will not used, and a volatilityof 70% is assumed for the time period 0-7.Risk-free rate – to be precise, the risk-free rate should be the US Treasury bill withthe same period and corresponding to the expiration of the option. In that case, forPage | 54
these three options, the risk-free rate should be different. But for the sake of simplicity,it is assumed here for the 7 years, a single risk-free rate is used. Thus, the risk-freerate of 5.79% is used, referred to the US 7-Year Treasury in the year 1999, which willexpire in 2006.Exercise price – for the option, the exercise price generally refers to the cost to investto keep the option open. In this case, however, the situation is very complex and foreach phase, the exercise prices (cost to invest) are different, for each situation (i.e.Depression only, Weight loss only and both), the exercise prices are different. Thetable below shows the exercise price (exercise price) estimated to correspond to eachsituation and phase, noting that the figures are the value at the corresponding time,rather than the present value.The costs should be adjusted to the year of investing respectively, which makes $40mat year 0 become $48.4m at Year 2 (40*1.12),$200m at year 0 become $292.82m at Year 4 (200*1.14),$150m at year 0 become $219.615m at Year 4 (150*1.14),$500m at year 0 become $732.05m at Year 4 (500*1.14),$250m at year 0 become $487.18m at Year 7 (250*1.17),$100m at year 0 become $194.87m at Year 7 (100*1.17),$400m at year 0 become $779.49m at Year 7 (400*1.17).Summarized as below:Table 5.2: Time value of investment costPage | 55
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 and 22: delayed in time. Undertaking one pr
Page 23 and 24: Figure 2.2: Advantages and disadvan
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: project turns out to be unprofitabl
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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