brand name and the visitors to its portal to establish
competitive advantages.
ThevalueofRediff.comasafirmcannowbeestimatedas
thesumofthediscountedcash flowvalueof$474million
andthevalueoftheoptiontoexpandintotheretailmarket
($155 million). It is true that the discounted cash flow
valuationisbasedonahighgrowthrateinrevenues,butallof
thisgrowthisassumedtooccurintheInternetportalbusiness
and not in online retailing.
In fact,the optionto enter online retailing isonly one of
several options available to Rediff.Another path it might
embark on is to become a development exchange for
resources—software developers and programmers in India
lookingforprogrammingworkintheUnitedStatesandother
developed markets. The value of this option can also be
estimated using an approach similar to the one shown earlier.
Option to Abandon Investments
Wheninvestinginnewprojects,firmsworryabouttherisk
thattheinvestmentwillnotpayoffandthatactualcashflows
willnot measure up to expectations.Having the optionto
abandon a project that does not pay off canbe valuable,
especiallyonprojectswithasignificantpotentialforlosses.
Inthissection,weexaminethevalueoftheoptiontoabandon
and its determinants.
Payoff on the Option to Abandon
The option pricing approach provides a general way of
estimating and building in the value of abandonment. To