businesseswithlower returns(suchashousing,utilities, or
automobile production).
Again,though,wehavetobecarefulnottodoublecountthe
valueoftheoption.Ifweuseahighergrowthratethanwould
be justifiedbased onexpectationsbecauseoftheoptionto
expand,wehavealreadycountedthevalueoftheoptionin
the discounted cash flow valuation. Adding an additional
componenttoreflectthevalueoftheoptionwouldbedouble
counting.
ILLUSTRATION12.9:ConsideringtheValueoftheOption
to Expand
Rediff.com is an Internet portal serving the Indian
subcontinent.InJune2000,thefirmhadonlyafewmillion
dollarsinrevenues,buthadtremendousgrowthpotentialasa
portaland electronic marketplace.Usinga discountedcash
flowmodel,wevaluedRediff.comat$474million,basedon
its expected cash flows in the Internet portal business.
AssumethatinbuyingRediff.com,weareinfactbuyingan
optiontoexpandintheonlinemarketinIndia.Thismarketis
asmallonenow,butcouldpotentiallybemuchlargerin 5 or
10 years.
Inmorespecificterms,assumethatRediff.comhastheoption
toentertheInternetretailingbusinessinIndiainthefuture.
Thecostofenteringthisbusinessisexpectedtobe$1billion
and,basedoncurrentexpectations,thepresentvalueofthe
cashflowsthatwouldbegeneratedbyenteringthisbusiness
todayisonly$500million.Basedoncurrentexpectationsof
the growth in the Indian e-commerce business, this
investment clearly does not make sense.