Fundamentals of Corporate Finance + Standard & Poor's Educational Version of Market Insight

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Valuation of an Acquisition Using Real Options Intel is considering the purchase of Hannover-Ceramics, Inc., a firm that has just patented a replacement for the silicon wafer, the arsenicon-dithurate wafer. As a result, Intel estimates that it will be able to manufacture a new generation of processor, with speeds upwards of 250 gigabytes. However, the current production method calls for the use of amenocebic acid, a naturally occurring substance with a cost of $200 per ounce. Each wafer requires, on average, 4 ounces of the acid to produce. Due to this limitation, the economic feasibility of this investment remains unclear. Intel engineers have invested $400 million and over 4000 work-hours over the past two years to develop a less expensive substitute for amenocebic acid. They have a potential substitute known as Carlinium, named in honor of the inventor. This substance, while far less expensive to produce ($50/ounce), requires 3 ounces to produce one wafer.
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This document was uploaded on 12/04/2011.

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Case1 - Valuation of an Acquisition Using Real Options...

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