Valuation methods comparative chart

Valuation method Definition When is it applied?

Estimates the cost of recreating the future utility of the technology Estimates the cost of recreating the future utility of the
Cost approach being evaluated, and assumes this value to be the future returns technology being evaluated, and assumes this value to be
from the technology the future returns from the technology

Is effective for assessing real estate, vehicles, general

Estimates the market price of a similar technology that has already purpose computer software, liquor license, and franchises,
Market approach
been traded on the market and applies it to their assessment it is not effective for assessing the cases like most
intangible assets or intellectual property

Considers the sum of the present values of future cash flows of

Estimation of the income generation period, the
the technology as the value of the technology. This concept,
Estimation of future income, the risks of no profit,
Income approach disregarding the costs of technology development, determines the
And the conversion of future earning into present
value of the technology according to its feasibility of creating
Value
expected profits

Incorporates the financial concept of options in technology

valuation, and as options are not considered as an obligation but a
right, the investors have the opportunity to correct their decision
Real options according to future environment When there is no need to rely on a subjective assessment
Using real options in investment decisions such as research and
development projects and technology transfer can guarantee
flexibility against future uncertainty in decision making
Goodwill mind map
 Typologies of Real options chart
•Typology of Real Options

Real Option Description Potential Applications

Possibility to defer capital outlay for an irreversible

Industries where institutional mechanisms such as licences or patents
investment project with uncertainty about important
Delay provide insulation from competitive action. (e.g. natural resource
influencing factors dissolving over time; Particularly sensitive
extraction, real estate development)
to competitive interaction.
Possibility to abandon a project before the end of its planned
Abandon useful life by selling it in secondary market and thus realizing Capital intensive industries with fairly efficient secondary markets.
the salvage value.
Possibility to increase (decrease) production capacity of an
Cyclical industries such as natural resource extraction or consumer
Expand / initial investment against a follow-up capital outlay (future
goods. Entry into new market with considerable uncertainty about
Contract cost savings) once the capacity of the base investment is no
future demand.
longer sufficient (too large)
Input: power generation, refineries, manufacturing processes, where
Possibility to switch between different processes (products), input substitutes are available, multinational companies with
i.e. inputs (outputs) based on relative cost; Incorporates also geographically separate production facilities. Output: Industries
Switching
switching the production location for multinational where small batch size or tailor-made products are important;
companies due to changes in relative factor costs. Industries that face a high volatility of demand and are subject to
fads and trends (e.g. toys, apparel).

Compound
Mixture of any of simple options Where there are two or more sources of uncertainty.
Options
•Methodologies of Real Option Valuation
Methodology Description Formula

Black-Scholes model is a closed form solution for

pricing a European call on non-divided paying stocks. It
Black-Scholes uses the continuous-time geometric Brownian motion
𝐶 = 𝑆 𝑁 𝑑1 − 𝐾 𝑒 −𝑟𝑇 𝑁(𝑑2 )
Model as underlying stochastic process. The continuous
application of the replicating portfolio argument leads
to their partial differential equation.

The binomial option pricing model was popularized by

Cox, Ross, Rubinstein (1979). It is based on the
replicating portfolio argument described in section 3.4,
except that the stock-price movements follow a more
strictly multiplicative binomial tree72. The fundamental
Binomial Tree
idea is that a certain time period, for instance, the time
Model
to expiration for an option, can be divided into equally
spaced, finite intervals Δt. The strict key assumption
here is that over each finite time interval, there are only
two states the underlying asset price can attain – up
movement (u) or down movement (d).
Black-Sholes exercise solution screenshot (Exercise C)
Black-Sholes exercise solution screenshot (Exercise C)
Innovation case questions
a) Chosen innovation case name: 3D - PRINTERS

b) What kind of valuation method would you use to value this kind of innovation?
Explain your reasons:
- Net Present Value Method, because is a method commonly used to value innovation
projects. It can measure the excess or shortfall of cash flows in present value terms
using a discount rate.
Innovation case questions
a) Create a mind map explaining the answer to the following question:
 Why is it recommended to use real options despite other methods to value software and
new technologies projects?
 Innovation case questions

a) If the case should be value by real options, describe the type of option you would apply,
explaining your answer.

It Would be the Option to Switching:

Switching options are the right to close an operation that is currently opened and the right to
open it later for a different fixed cost to a common type of option. The option to exit and then
re-enter an industry, the option to switch between two modes of operation, and the option to
start up and shut down a facility are all switching options

The reason why is because 3D-Printers can be apply in a lot of industries and the posibilitie to
change the way to developt the project must be on the table
 Kang, Y. (2009). Real Option Valuation of Product Innovation. Retrieved
from:http://bibliotecavirtual.unad.edu.co:2051/login.aspx?direct=true&db=nlebk&AN=79
3059&lang=es&site=eds-live
 Baek, D., Sul, W., Hong, K., and Kim, H. (March 1, 2007) A technology valuation model to
support technology transfer negotiations. R&D Management. Retrieved
from:http://bibliotecavirtual.unad.edu.co:2051/login.aspx?direct=true&db=buh&AN=3210
0351&lang=es&site=eds-live