competitiveadvantagecomesfrombeingthefirstmoverina
marketorfromhavingtechnologicalexpertise,itwillcome
underassaultfar sooner.Themost directwayof reflecting
this competitiveadvantagein thevalueoftheoptionisits
life; the life of the option can be set to the period of
competitive advantage,and only theexcess returns earned
over this period count toward the value of the option.
Iftheanswerinallthreecasesisaffirmative,thentheoption
toexpandcanbevaluable.Applyingthelasttwoteststothe
AmBevexpansionoption,wecanseethepotentialproblems.
AmBevdoesnothaveanexclusiverighttoproduceGuaraná.
If the initial introduction proves successful, it is entirely
possible that Coke and Pepsi could produce their own
versionsofGuaranáforthenationalmarket. Ifthisoccurs,
AmBev will have expended $100 million of its funds to
provide market information to its competitors. Thus, if
AmBev gets no competitive advantage in the expansion
marketbecauseofitsinitialinvestment,theoptiontoexpand
ceasestohavevalueandcannotbeusedtojustifytheinitial
investment.
Nowconsidertwointermediatescenarios.IfAmBevgetslead
time on the expansion investment because of its initial
investment,wecouldbuildinhighercashflowsforthatlead
timeandafadingofftolowercashflowsthereafter.Thiswill
lowerthepresentvalueofthecashflowsfortheexpansion
andthevalueoftheoption.Asimpleradjustmentwouldbeto
capthepresentvalueofthecashflows,theargumentbeing
thatcompetitionwillrestricthowlargethenetpresentvalue
canbecomeandvaluetheoptionwiththecap.Forinstance,if
weassumethatthepresentvalueofthecashflowsfromthe