Thereissubstantialuncertaintyaboutfuturegrowthinonline
retailinginIndiaandtheoverallperformanceoftheIndian
economy.Iftheeconomyboomsandtheonlinemarketgrows
faster than expected over the next five years, Rediff.com
mightbeabletocreatevaluefromenteringthismarket.Ifwe
leavethecostofenteringtheonlineretailingbusinessat$1
billion, thepresentvalue ofthecash flowswould haveto
increaseabovethisvalueforRediff.comtoenterthisbusiness
andaddvalue.Thestandarddeviationinthepresentvalueof
theexpectedcashflows(whichiscurrently$500million)is
assumed to be 50%.
ThevalueoftheoptiontoexpandintoInternetretailingcan
nowbe estimated usingan option pricingmodel, with the
following parameters.
The value of the option to expand can be estimated.
Whydoestheoptionexpireinfiveyears?Iftheonlineretail
market in India expands beyond this point in time, it is
assumedthatthere willbe otherpotentialentrantsintothis
market and that Rediff.com will have no competitive
advantages and hence no good reason for entering this
market. Iftheonlineretailmarketin Indiaexpands sooner
thanexpected,itisassumedthatRediff.com,asoneofthe
fewrecognizednamesinthemarket,willbeabletoparlayits