Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

(Hop HipldF0AV) #1

Toprovideacontrast,thenetpresentvalueofthisprojectis
only $547 million.


Thetime premiumof$360 milliononthis option($907 −
$547)suggeststhatthefirmwillbebetteroffwaitingrather
than developing the drug immediately, the cost of delay
notwithstanding. However, the cost of delay will increase
over timeand makeexercise (development)morelikely in
future years.


Toillustrate,wevaluedthecalloption,assumingthatallof
theinputs,otherthanthepatentlife,remainunchanged.For
instance, assumethat thereare 16 years leftonthepatent.
Holding all elseconstant, thecost of delay increasesas a
result of the shorter patent life.


Thedeclineinthepresentvalueofcashflows(whichisS)
andtheincreaseinthecostofdelay(y)reducetheexpected
valueofthepatent.Figure12.2graphstheoptionvalueand
the net present value of the project each year.


FIGURE 12.2 Option Value versus Net Present Value of
Patent

Free download pdf