The Valuation of a Patent through the Real Options Approach: A Tutorial

2015 ◽  
Vol 10 (1) ◽  
pp. 99-116 ◽  
Author(s):  
Gianpaolo Iazzolino ◽  
Giuseppe Migliano
Keyword(s):  
Real Options ◽  
Net Present Value ◽  
Discounted Cash Flow ◽  
Chemical Absorption ◽  
The Real ◽  
Italian Case ◽  
Real Options Approach ◽  
Financial Options ◽  
Flat Screen

AbstractThe importance of knowledge and other intangible activities for the success of an enterprise have been broadly recognized over the last few years. In this paper a tutorial is illustrated on the valuation of a patent through the real options approach (ROA), since the use of the discounted cash flow (DCF) methods, such as the net present value (NPV), seems to show issues when evaluating opportunities, such as the ones offered by intangible activities. The logic underlying ROA is tightly based on financial options and, in this sense, uncertainty can be seen as an opportunity, and not necessarily as a threat and its effect on the value of an activity can become positive. The patent analysed (registered in 2009) is a patent by the Alfa Group (this is not the real name of the firm but is used here for privacy reasons), which is a worldwide leader in the production of Getters, metallic elements that, through a chemical absorption process, keep the devices in which they are embedded in vacuum status. Such equipment is used in lightning systems, monitor screens, flat screen TVs, etc. In this tutorial, an ROA has been developed in order to demonstrate how the value of intangible assets can be estimated by using an Italian case study that can be useful for further studies and uses.

Assessment of irrigation dam using real options and discounted cash flow approaches: a case study in Greece

Water Policy ◽  
2009 ◽  
Vol 11 (4) ◽  
pp. 481-488 ◽  
Author(s):  
Anastasios Michailidis ◽  
Konstadinos Mattas ◽  
Diamantis Karamouzis
Keyword(s):  
Real Options ◽  
Cash Flow ◽  
Flow Analysis ◽  
Discounted Cash Flow ◽  
Northern Greece ◽  
Uncertainty Factors ◽  
The Real ◽  
Discount Cash Flow ◽  
Real Options Approach

This article extends the evaluation techniques of an irrigation dam in northern Greece, called “Petrenia”, by comparing the real options approach along with, a traditional one, the discount cash flow. By introducing first a Monte Carlo simulation, the various uncertainty factors can be simulated and alternative value options can be computed, feeding them later in the real options model. Results from the case study in Greece clearly demonstrate that the irrigation dam can be classified as a profitable investment, by applying traditional discount cash flow analysis, while by applying the real options approach the project cannot be classified as profitable. Taking into consideration the uncertainty factors, the real options approach reveals that the investment could be postponed and decision makers can keep the option of investing open. Sequentially, discount cash flow analysis accompanied by the real options approach facilitates decision making and improves the investment assessment analysis. In this particular project assessment, two uncertainty factors, variation in dam capacity and water price, restrict the profitability of the irrigation dam, according to the results of the real options approach.

Business opportunity assessment in Slovene organic spelt processing: application of real options model

2011 ◽  
Vol 26 (3) ◽  
pp. 179-184 ◽  
Author(s):  
Karmen Pažek ◽  
Črtomir Rozman
Keyword(s):  
Decision Making ◽  
Real Options ◽  
Net Present Value ◽  
Sunk Costs ◽  
Organic Farms ◽  
Processing Application ◽  
The Real ◽  
Business Opportunity ◽  
Real Options Approach ◽  
Flour Production

AbstractDecision making in organic farming is related to risk and uncertainty, and options must be evaluated in the decision-making process. This paper presents the methodology of an integrated deterministic simulation system (KARSIM 1.0) application for decision-making support on organic farms in northeastern Slovenia. An emphasis to modify the net present value (NPVt) criterion by incorporating the real options approach was made. Its application is shown in organic spelt (Triticum aestivum ssp. spelta McKey) production and processing using two real options approaches, the Black–Scholes and binomial models. The NPVt indicates that the decision to process spelt for animal fodder is financially unfeasible, while the real options approach differentiates the results by organic spelt grain and flour production for human nutrition. It may be concluded that the real options approach can be useful when assessing projects with uncertainty, sunk costs and irreversibility, and it can provide for examining agricultural investment decisions.

scholarly journals The real options method applied to decision making – an investment analysis

2019 ◽  
Vol 16 (4) ◽  
pp. 562-571 ◽  
Author(s):  
Guilherme Brittes Benitez ◽  
Mateus José do Rêgo Ferreira Lima
Keyword(s):  
Decision Making ◽  
Real Options ◽  
Cash Flow ◽  
Investment Analysis ◽  
Discounted Cash Flow ◽  
The Real ◽  
Managerial Flexibility ◽  
Building Project ◽  
The Impact

Goal: This study aims to assess the impact of using the method of real options in investment analysis through a case study on a retail firm. Design / Methodology / Approach: It was targeted the applications of the real options method in a different type of environment and it was compared to another method more commonly used, the discounted cash flow method (DCF). The implementation and assessment of the real options method was investigated by means of a case study conducted in an investment analysis in a retail units firm. Results: The use of the real options method showed a more concise applicability over the DCF method. The results show that the project’s value, after the inclusion of managerial flexibility, increased significantly, which indicates that the analysis of the discounted cash flow undervalued the investment in question, since it disregarded the flexibility to expand or abandon the project. Limitations of the investigation: The presented method is proper to long-term processes where it is possible to make changes during the project. Investments in this sector usually are more related to short and medium-term decisions, making the application difficult due to the short decision-making period available to the managers. Practical Implications: The study provided the incorporation of flexibility through different pathways during the building project in a retail units firm. It was showed different scenarios where practitioners could decide among expanding, proceeding, reducing or abandoning the retail units based on the characteristics of their investments. Originality/value: The results obtained are an indication of this methodology to industrial businesses that are relatively volatile and that need a certain degree of flexibility in order to burgeon, such as the case of the retailing sector.

scholarly journals A Real Options Approach to Valuate Solar Energy Investment with Public Authority Incentives: The Italian Case

Energies ◽  
2020 ◽  
Vol 13 (16) ◽  
pp. 4181
Author(s):  
Antonio Di Bari
Keyword(s):  
Solar Energy ◽  
Real Options ◽  
Real Option ◽  
Net Present Value ◽  
Option Value ◽  
Present Value ◽  
Energy Investment ◽  
The Real ◽  
Real Options Approach ◽  
Real Option Value

Solar energy investment represents currently a valid reason to support sustainable economic development. In fact, over the last few years, governments have applied different measures to incentivize private consumers and firms to use renewable energies. Photovoltaic (PV) projects are characterized by uncertainty due to meteorological conditions, the unpredictable behavior of government, and managerial flexibility. Since the Net Present Value (NPV) approach is not able to capture these uncertain factors, it was replaced with the Real Options Approach (ROA). The latter method manages to embed flexibility in PV investment using binomial trees. This paper valuates PV investment in all regional areas in Italy using an integrated approach between the discounted cash flows method and real option value, called Expanded Net Present Value (ENPV). We fit the probability of tax benefits into a binomial lattice model after analyzing the geographical position and weather conditions of all regional capitals of Italy. The results show that the cities with high irradiance/temperature have positive NPV and high investment values. On the other hand, while most cities have negative NPV, the inclusion of the flexibility in investment decisions gives additional value to the project, making the ENPV positive and implying an attractive investment opportunity with the possibility of delaying the project. We also propose a sensitivity analysis that shows how the real option value changes when incentive policies of the government become more attractive. This paper contributes to the existing literature in the way of considering financial, meteorological/geographical, and political factors to valuate PV investment.

DQ Options

2011 ◽  
pp. 243-276
Author(s):  
Monica Bobrowski ◽  
Sabrina Soler
Keyword(s):  
Data Quality ◽  
Real Options ◽  
Net Present Value ◽  
Critical Role ◽  
Methodological Framework ◽  
Real Options Approach ◽  
Starting Point ◽  
Tactical Decision

Data plays a critical role in organizations up to the point of being considered a competitive advantage. However, the quality of the organizations’ data is often inadequate, affecting strategic and tactical decision making, and even weakening the organization’s image. Nevertheless it is still challenging to encourage management to invest in data quality improvement projects. Performing a traditional feasibility analysis based on Return on Investment, Net Present Value, etc., may not capture the advantages of data quality projects: their benefits are often difficult to quantify and uncertain; also, they are mostly valuable because of the new opportunities they bring about. Dealing with this problem through a real options approach, in order to model its intrinsic uncertainty, seems to be an interesting starting point. This paper presents a methodological framework to assess the benefits of a Data Quality project using a real options approach. Its adequacy is validated with a case study.

scholarly journals Forest management decision making based on a real options approach: An application to a case in northeastern Argentina

2017 ◽  
Vol 67 (1) ◽  
pp. 97-108 ◽  
Author(s):  
Diego Broz ◽  
Gastón Milanesi ◽  
Daniel Alejandro Rossit ◽  
Diego Gabriel Rossit ◽  
Fernando Tohmé
Keyword(s):  
Real Options ◽  
Discount Rate ◽  
Real Option ◽  
Net Present Value ◽  
Optimal Time ◽  
Management Decision ◽  
The Real ◽  
Real Options Approach ◽  
Management Decision Making

Abstract The Net Present Value (NPV) approach is widely applied to assess forest investments, but this method has serious shortcomings, which we propose to overcome by switching to the assessment through the Real Options Approach (ROA). The model in this paper starts with the simulation of the forest’s growth, combined with the projection of the products’ prices and valuing the assets using a binomial model. We include an option of postponement, determining the optimal period of felling. We find that ROA is more robust than the NPV approach because it relaxes the assumption of constancy of both the prices and the discount rate, allowing the determination of the optimal time of felling based on the growth rate of either the forest or the prices of its products. Contrary to the traditional NPV approach, the results obtained with ROA exhibit longer harvest turns and consequently higher profits. The key variable in the ROA, the Real Option Value (ROV) can be shown to be less (albeit moderately) sensitive to decreases of the discount rate than NPV. Moreover, ROV is moderately sensitive to decreases in the price of logs and is negligibly affected by rises in the costs of harvesting, loading and transporting rolls.

scholarly journals Valuation of Wind Energy Turbines Using Volatility of Wind and Price

2021 ◽  
Author(s):  
Doron Greenberg ◽  
Michael Byalsky ◽  
Asher Yahalom
Keyword(s):  
Wind Energy ◽  
Real Options ◽  
Net Present Value ◽  
Discounted Cash Flow ◽  
Energy Investment ◽  
Real Options Analysis ◽  
The Real ◽  
Investment Projects ◽  
Managerial Flexibility ◽  
Renewable Energy Investment

The limitedness of the nonrenewable local energy resources in Israel, even in background of the later gas fields’ findings, continues to force the state to devote various efforts for the ‘green’ energy development. These efforts include installations both in the solar and in the wind energy, with a purpose to improve the diversity of energy sources. While the standard discounted cash flow (DCF) method using the net present value (NPV) criterion is extensively adopted to evaluate investments, the standard DCF method is inappropriate for the rapidly changing investment climate and for the managerial flexibility in investment decisions. In recent years, the real options analysis (ROA) technique is widely applied in many studies for valuation of renewable energy investment projects. Hence, we apply in this study the real options analysis approach for the valuation of wind energy turbines and apply it to the analysis of wind energy economic potential in Israel.

APPLYING REAL OPTIONS AND THE MAXIMUM NPV RULE TO MARKET ENTRY/EXIT STRATEGIES

2005 ◽  
Vol 22 (01) ◽  
pp. 71-83 ◽  
Author(s):  
TYRONE T. LIN ◽  
TUNG-LI SHIH
Keyword(s):  
Decision Making ◽  
Growth Factors ◽  
Real Options ◽  
Market Entry ◽  
Net Present Value ◽  
Cash Flows ◽  
Present Value ◽  
The Real ◽  
Real Options Approach ◽  
Complex Calculation

This study applies the real options approach to examine the maximum net present value of the market entry/exit thresholds given uncertain cash flows. The discount and growth factors are determined in the proposed entry/exit models, facilitating the complex calculation of the discount and growth rates to determine the present value of cash flow streams. Accordingly, this work successfully combines the maximum net present value method and the real options approach for decision-making by simply considering the discount and growth factors.

scholarly journals A real options approach to a classical capacity expansion problem

2005 ◽  
Vol 25 (2) ◽  
pp. 159-181 ◽  
Author(s):  
Antonio G. N. Novaes ◽  
João Carlos Souza
Keyword(s):  
Real Options ◽  
Infinite Horizon ◽  
Classical Problem ◽  
Capacity Expansion ◽  
Discounted Cash Flow ◽  
The Real ◽  
Classical Capacity ◽  
Real Options Approach ◽  
Decision Alternatives ◽  
Demand Patterns

Some authors, considering deterministic or stochastic demand patterns and different forecasting formulations, have studied the classical problem of optimally meeting a growing demand for capacity, over an infinite horizon. With this approach, only investment costs discounted with a predefined interest rate are considered in the analysis. Adding other expenditures and revenues, managers usually estimate the discounted cash flow of the project, and assume the organization will follow a predetermined plan when investing, regardless of how events unfold in the future. The real options approach, on the other hand, introduces the possibility of incorporating other decision alternatives in the economic analysis, such as the option of waiting or postponing, abandoning, switching, etc. In this paper we first review the classical capacity expansion models. Then, the concepts and properties of the real options approach, with emphasis on the Black-Scholes equation, are briefly discussed. Finally, an application example is presented and discussed.

scholarly journals Manager’s Flexibility & Cancellation Option: Insights of a Case Study in the Latin American Oil Industry

2017 ◽  
Vol 1 (3) ◽  
Author(s):  
Arthur Ridolfo Neto ◽  
Marcelo Moreira Russo
Keyword(s):  
Real Options ◽  
Latin American ◽  
Real Option ◽  
Net Present Value ◽  
Option Valuation ◽  
Investment Opportunity ◽  
Gas Field ◽  
The Real ◽  
Real Option Valuation

Purpose: This article focused on the main business insights of the use of Real Options valuation analysis in the eyes of a finance professional. It used a case study of an investment opportunity in the oil and gas field services industry in Latin America to discuss the methodology implementation and its insights. As a secondary objective, it discussed the insights and options embedded in this investment opportunity.Methodology: The investment opportunity was examined using the Real Options Analysis (ROA) framework and the results compared to the traditional methodology of Net Present Value. The valuation technique was performed as if it had been applied at the time the project was approved.Findings: The most important of Real Option valuation is not the results, but how one arrives at them. After the project value is calculated and the project approved or not, the Real Option valuation requires and supports the monitoring of the project. By understanding how the options are created, managers can make better decisions about the project after it was approved.Practical implications: A relevant contribution from the study was the discussion, as a practitioner, of the methodology implementation in a real world corporation. Originality & value: The case study evaluated two types of real options: first, the effect of an option to cancel a contract that was assessed from the perspective of the client contracting the project; and second, the option to abandon and defer, from the perspective of the company that will perform the investment to provide the services. By incorporating the cost of the put option that the company puts forth for the client (cancellation option) it reduces the project value by giving flexibility to its clients.

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