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 Ð I know that this is unrealistic Ð 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?