Themost difficultintangible assetsto value arethose that
havethepotentialtocreatecashflowsinthefuturebutdonot
producethemrightnow.While theseassetsaredifficultto
value ona discounted cash flowvaluationbasis and often
impossibletoevaluateonarelativebasis,theydohaveoption
characteristics and are best valued using option pricing
models.Inthissection,webeginbylookingatundeveloped
patents and natural resource reserves as options and then
move on to consider two less clearly defined intangible
assets—theoptiontoexpandintonewmarketsandproducts
and the option to abandon investments. (Appendix 12.1
provides a short overview of option pricing models.)
Undeveloped Patents
Apatentprovidesafirmwiththerighttodevelopandmarket
a productorserviceand thuscanbe viewedasan option.
Whilean undevelopedpatentmaynotbe financiallyviable
todayandgeneratecashflows,itcanstillhaveconsiderable
valuetothefirmowningitbecauseitcanbedevelopedinthe
future. In this section, we consider first the mechanics of
estimatingthevalueofapatentasanoptionandthenexpand
thediscussiontoconsiderhowbesttovalueafirmwithboth
developed products and undeveloped patents.
Valuing a Patent as an Option
Considerthepayofftothefirmfromitsuseofthepatent.The
firmwilldevelopa patent onlyif thepresentvalue ofthe
expectedcashflowsfromtheproductsalesexceedsthecost
of development,as shown in Figure 12.1.If this doesnot
occur,thefirmcanshelvethepatentandnotincuranyfurther
costs.IfIisthepresentvalueofthecostsofcommercially