or re pli cate bt7n sho uldth e 1 n111a l laun ch be succe ss ful s imilarl y

Or re pli cate bt7n sho uldth e 1 n111a l laun ch be

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or re pli cate ; bt~7n~~: sho uldth e 1 n111a l laun ch be succe ss ful -s imilarl y ackn ow l edges th e va lu e o f g~ ow ;l ~ o ptions . Strat egy Cap sule 2.6 a ddre sses th e calcula ti on of real op ti on va lu es . Strategy as Options Management For strat egy fo rmulati on. o ur prima ry int erest is h ow we can us e the principles o f opt io n val uati on to create s hareh o ld er va lu e. Th ere are two ty pes of real op ti o n: growth o pti ons a nd n exi bilit y op tion s. Grow th o ptions allow a firm to mak e sm all init ia l in vesll nc nt s in a number of futur e bus in ess opport uniti es but w ith o ut co m- millin g to th em. H ex ibi/i ty op ti ons relate to the design of project s and pl a nts th at pe rmit adap tati on 10 different c ir c um s tan c es- fl exib le ma nufa c turin g systems a ll ow diHe r en t produ ct m ode ls to be manufa c tur ed on a s in gle produ c ti on lin e. Indi vi du al pro j ec ts can be de signed 10 intr o du ce bo th gr ow th o pti ons a nd fl ex ibili ty op ti o ns . Thi s means avoidin g c ommitme nt 10 th e co mplete project a nd introduc in g de cision points at multi ple stages. where the main o ption s are to delay, m odify , scale up , or aband on th e project. Merck. an ea rl y adopter of o pti on pri c in g, notes, " When you make an initial in ve s tm e nt in a re s earc h proj ec t, you are paying an e nt ry f ee for a ri,l(ht. b ur yo u are not ob li gated to co ntinu e that re search at a lat er st ag e:•J• I Calculating Real Option Value Appl ica ti on or r ea l opt io n val ue to inv es tment proJects and s tr ategies has been limit ed by the co mpl exity of th e va luation techniques. Yet. even without gett ing mto the mathemat ics needed to quant ify o pt ion val- ues, we ca n u se the ba sic pr in op l es i nvolv ed to under- sta nd the fa ctors that de termine op tion values and to recognize how projects and strategi es ca n be designed 1n order to max1m 1ze their op tion va lues. The ea rl y work on real option va lu a ti on adapted th e Blac k -S cho l es optio n-prici ng formula devel ope d for va lu ing fi nancial op ti ons to the va luation of r eal invest- ment project s.• Bl ac k-Scho le s compri se s six de termi- nants of op t ion va lu e, eac h of wh ic h ha s an analogy in the valuation of a real option: St oc k pr ice: The NPV of th e project: a h ig he r N PV increases option value . Exercise pri ce: Investment cost the higher t he cos t, th e lower th e option va lu e. Un certainty: for bo th financial and rea l o pt ions, unce rt ainty increa ses option va lue . ,i Time to expiry: f or both financ ial and real optio ns, th e longer the op tion l asts, th e gre at er its value. Dividends: Decrease in th e value of the invest- men t over the opt ion period: lowers option value.
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