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ENPV (or say NPV + O), which is the NPV including the flexibility, can be calculatedas in the table below:Table 5.4 ENPVThe value of the Option A (which has included the value of Option B, as the way ofcalculation), can be calculated by multiply the Option Value of each situation (as justderived) by the probabilities of different outcomes, and add them together, whichgives $99.99 million. Alternatively, first multiply CF** (= Original CF + OptionValue of each situation) by the probabilities of different outcomes, add them together,(which gives the ENPV of $113.97 million), and then minus the NPV. The calculationshows that by using a binomial tree approach, the realization of real options hasincreased the NPV by $99.99 million, which is the value of flexibility.5.3.4 Valuation of the compound option –compound rainbow optionIn the figure below, the value of the compound rainbow option is calculated, withinconsideration of two separate but unrelated uncertainties, i.e. technical and marketuncertainties.Moving all the way back to year 0, the NPV (with flexibility) is $49.05 million. Andgiven the original NPV is $13.98 million, the value of the option is $35.05 million.Page | 62
Figure 5.13 Valuation of Compound rainbow optionPage | 63
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 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: Figure 5.12: Valuation of Option A
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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