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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ewrite as, not<strong>in</strong>g all the costs (<strong>in</strong> figure 5.9) are the value adjusted <strong>to</strong> the <strong>real</strong> time:Figure 5.9: new flow chart <strong>of</strong> the Davanrik R&D process (<strong>real</strong> time value)5.3.2 Valuation <strong>of</strong> the compound option A us<strong>in</strong>g simple <strong>valuation</strong> methodFor the situation when PV = $1200m, option value V Bd (Depression) = $245.67m need<strong>to</strong> be add <strong>to</strong> the last branch <strong>of</strong> the b<strong>in</strong>omial tree <strong>of</strong> Option A, which is at the end <strong>of</strong>year 7. At year 7, the value, V, is determ<strong>in</strong>ed by max [(S-X+V B ), o]. The term(S-X+V B ) represents the situation when the earlier option is exercised, at cost X, but itcan get a value <strong>of</strong> flexibility. Or say, if and only if the PV <strong>to</strong>gether with flexibilityvalue is larger than the cost <strong>to</strong> cont<strong>in</strong>ue it, the project can be cont<strong>in</strong>ued, otherwise, itPage | 57