Weekly Challenge 10

You have been asked to value a technology patent for a telecomm firm and have come up with the following inputs into the valuation:

q If you introduced the patent today, the present value of your expected cashflows would be $ 1.025 billion.

q The cost of the introduction is expected to be $ 1 billion today.

q You have the patent for the next 16 years

q The standard deviation in firm value of publicly traded research-oriented telecomm firms is 50%

q The riskless rate is 5%

a. Estimate the value of the patent as an option.

b. Estimate the net present value of converting the patent into a commercial product today.

c. What do the answers to the first two questions tell you about whether you should convert the patent into a product today?

d. Holding the present value of the cashflows and the cost of introduction fixed – I know that this is unrealistic – estimate the year in which it would be optimal to convert the patent.

e. How would your answers to the previous questions change if you knew that a competitor was 7 years away from developing an equivalent product?