application of real options valuation to r&d investments in ...

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