Real Option Valuation of Product Innovation

Content

Abstract

1. Introduction

1.1. The Problem on the Valuing Product Innovation

1.2. Goal of the Thesis

1.3. Methodology

2. Basic Concepts of Valuation on Product Innovation

2.1. Definition and Character of Product Innovation

2.1.1. Definition of Product Innovation

2.1.2. Character of Product Innovation

2.2. Main Challenges in Valuing Product Innovation

2.3. Selection of the Adequate Methodology

2.3.1. Net Present Value

2.3.2. Other traditional approaches

3. Introduction of Real Option Valuation

3.1. The Definition of an option

3.2. Difference between Real Options and Financial Options

3.3. Value Drivers of Real Options

3.3.1. Value Drivers relating to the underlying asset and financial market

3.3.2. Uncertainty

3.3.3. Managerial Flexibility

3.4. Typology of Real Options

3.4.1. The Option to Delay

3.4.2. The Option to Abandon

3.4.3. The Option to Expand

3.4.4. The Option to Contract

3.4.5. The Option to Switching

3.4.6. Compound Option

3.5. Methodology of Real Option Valuation

3.5.1. Black-Scholes Model

3.5.2. Binomial Tree Model

3.5.3. Selection of the adequate methodology

4. Applying Real Option Valuation to the illustration BlackBerry

4.1. Introduction of the Product Innovation BlackBerry

4.2. Valuing Process of the chosen example

4.2.1. First Step: Valuing without Flexibility . Traditional DCF Method

4.2.2. Second Step: Model the Uncertainty ---- Using Event Tree

4.2.3. Third Step: Identity and Incorporate Managerial Flexibility

4.2.4. Fourth Step: Conduct Real Options Analysis

5. Conclusion

5.1. Thesis Summary

5.2. Limitation of Real Option Valuation

5.3. Possible Complementation of Real Option Valuation

5.3.1. Combining ROV and DCF

5.3.2. Other Possible Complementation

6. Appendix

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