How can you evaluate a potential investment if there are several possibilities to change the course of action in the future depending on different emerging situations? And even more challenging: How can you do so if you cannot come up with point estimates - but you have to use several ranges of input values? Both - managerial flexibility as well as so called continuous uncertainty - are highly relevant as they reflect most of the investment decisions realistically. But if you apply standard valuation techniques like a simple Discounted Cash Flow model, the computed value will be significantly distorted, potentially prompting you to make a wrong decision.
Given the practical urgent need for a suitable valuation technique, the real option valuation approach was developed as an advanced valuation approach. It follows a non-trivial but doable four-step process, quantifying the value of investments in situations of managerial flexibility and continuous uncertainty.
While real option valuation is considered to be an opaque technique, Ms. Kang proves that it can be explained in an understandable way, even for someone approaching the matter with limited or no prior exposure to the topic.
The author outlines the major issues of current product innovation valuation with traditional valuation techniques. On the basis of this analysis she explains the basic concepts of valuing product innovation through the use of real option valuation. Supported by a few practical examples the author clarifies how to value different types of real options. So based on the actual Financial Statement 2006 of Research In Motion (RIM), the author develops a sample 5-year business plan for the product innovation of BlackBerry 9900. This is done through the highly advanced model of Binomial Trees.
Overall with this thesis, you'll get a head-start into one of the more advanced management tools - the real option valuation.
Inhaltsverzeichnis
1;Content;3 2;Abstract;5 3;1. Introduction;7 3.1;1.1. The Problem on the Valuing Product Innovation;7 3.2;1.2. Goal of the Thesis;9 3.3;1.3. Methodology;10 4;2. Basic Concepts of Valuation on Product Innovation;13 4.1;2.1. Definition and Character of Product Innovation;13 4.1.1;2.1.1. Definition of Product Innovation;14 4.1.2;2.1.2. Character of Product Innovation;15 4.2;2.2. Main Challenges in Valuing Product Innovation;19 4.3;2.3. Selection of the Adequate Methodology;21 4.3.1;2.3.1. Net Present Value;21 4.3.2;2.3.2. Other traditional approaches;23 5;3. Introduction of Real Option Valuation;26 5.1;3.1. The Definition of an option;26 5.2;3.2. Difference between Real Options and Financial Options;28 5.3;3.3. Value Drivers of Real Options;29 5.3.1;3.3.1. Value Drivers relating to the underlying asset and financial market;29 5.3.2;3.3.2. Uncertainty;31 5.3.3;3.3.3. Managerial Flexibility;33 5.4;3.4. Typology of Real Options;35 5.4.1;3.4.1. The Option to Delay;37 5.4.2;3.4.2. The Option to Abandon;39 5.4.3;3.4.3. The Option to Expand;40 5.4.4;3.4.4. The Option to Contract;42 5.4.5;3.4.5. The Option to Switching;44 5.4.6;3.4.6. Compound Option;46 5.5;3.5. Methodology of Real Option Valuation;49 5.5.1;3.5.1. Black-Scholes Model;50 5.5.2;3.5.2. Binomial Tree Model;51 5.5.3;3.5.3. Selection of the adequate methodology;55 6;4. Applying Real Option Valuation to the illustration BlackBerry;56 6.1;4.1. Introduction of the Product Innovation BlackBerry;57 6.2;4.2. Valuing Process of the chosen example;58 6.2.1;4.2.1. First Step: Valuing without Flexibility . Traditional DCF Method;60 6.2.2;4.2.2. Second Step: Model the Uncertainty ---- Using Event Tree;63 6.2.3;4.2.3. Third Step: Identity and Incorporate Managerial Flexibility;65 6.2.4;4.2.4. Fourth Step: Conduct Real Options Analysis;69 7;5. Conclusion;74 7.1;5.1. Thesis Summary;74 7.2;5.2. Limitation of Real Option Valuation;75 7.3;5.3. Possible Complementation of Real Option Valuation;77 7.3.1;5.3.1. Combining ROV and DCF;77
7.3.2;5.3.2. Other Possible Complementation;79 8;6. Appendix;81 9;Autorenprofil;84
