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Real Options I: Tests

Real Options I: Tests. A viable investment today?.

jamalia-erickson
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Real Options I: Tests

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  1. Real Options I: Tests

  2. 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? • Yes • 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? • Yes • No Explain.  

  3. 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? • Increase in number of years left on the patent life • I would pay more • I would pay less • Higher uncertainty about future markets/ cash flows • I would pay more • I would pay less

  4. 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?)

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