Aswath Damodaran1 Real Options I: Tests. Aswath Damodaran2 A viable investment today? A small start up company has come up with a new cell phone technology.

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Presentation transcript:

Aswath Damodaran1 Real Options I: Tests

Aswath Damodaran2 A viable investment today? A small start up company has come up with a new cell phone technology that promises to speed up download speeds and create a smoother interface. The cost of implementing the technology is expected to be $ 2 billion and the present value of the expected cash flows from it is only $1.5 billion. Should they implement the technology now? a.Yes b.No Now assume that you work for an established cell phone manufacturer (Apple or Samsung). Would you be willing to pay for this non-viable technology, assuming that the company has patented it and has many years left on the patent life? a.Yes b.No Explain.

Aswath Damodaran3 Determinants of value… Assuming that you would be willing to buy this non-viable technology, explain how each of the following will affect how much you would be willing to pay? a. Increase in number of years left on the patent life i.I would pay more ii.I would pay less b. Higher uncertainty about future markets/ cash flows i. I would pay more ii.I would pay less

Aswath Damodaran4 Developing the technology… Assume that you do buy the technology and that it becomes viable (PV of cash flows > Cost of implementation). Would you develop the technology immediately? Yes No Explain. (What is the trade off that you are making?)