Brazilian Wax In Lowell ,ma

Call Option in the world of real goods

real options analysis as a method for evaluating investments under uncertainty with options in several posts was an issue (see 2010, all 24 May).

For a presentation I just did a real shift option (equivalent to a call option) with reduced, simplified figures and parameters is short.

Company A has developed a new innovative product. This was done in close cooperation with suppliers, in the framework of this project, in turn, brought a technical innovation for mass production.
There were no agreements on exclusivity, as expected as Company A "First to Market" a sustained advantage over subsequent imitators.

The assessment of the market has However, last year changed dramatically. The sales opportunities for the product and thus seem attainable future margins to be very insecure with high variability.

consider Company A, with production and market introduction IMPOSE FINES and still having to buy from the supplier the exclusive rights to the solution for three years.

The question is: What is this exclusivity - ie, make the right investment decision within the next three years to be able to - worth it?

numbers:
The investment for the production start is (base period value t0) € 11 million
maturity = 10 years
cash flow from the product sales = € 3 million per annum (as I said - in simplified form, ie no start-up curve, etc ...)
rate discrete = remove 12% pa

to how the graphs below, the value of the option depends strongly on the expected volatility of future profit margins. are

In a volatility of 10% in the period t1 99.9% of the present value of future DB's 13433-25745 (see chart 1)
In this case, the option has no value (see Chart 3) The probability of
immediate investment is 100% (see Chart 4)

At a volatility of 50% is in the period t1 99.9% the present value of future DB's 3243-83875 (see Figure 2)
In this case, the option has a value of almost € over a million (see Chart 3)
The probability of the exercise ie the investment drops to 75% and is first year, 63.8% (see Chart 4)

Overall, the results fall for the option only at high volatilities clearly.
The reason is that assumed was that only the volumes are uncertain and that all current payments and receipts be proportional to the amount. Therefore, the contribution can not be negative.

Had ongoing fixed costs involved, the value of the option would already respond to low volatility increases more.



Figure 1

Figure 2

Figure 3

Chart 4