splice and sequence developed a new tool that accelerate tha DNA sequencing of g
ID: 1244878 • Letter: S
Question
splice and sequence developed a new tool that accelerate tha DNA sequencing of geenmes. this advance technology has great market potential while exhibiting high market uncertainty at the same time. this project lunch cost is expected to be 300 million, with the same estimate DCF based payoff. the annual volatility factor is 30%, and and the continous anual risk free rate for the next five years is 5%. if the company can wait for five years before introducing the product in to market, what is the real option value of this project? calculate ROV based on Black-Scholes,binomial, and montecarlo simulation methods for comparison puposeExplanation / Answer
Product marketing deals with the first of the "7P"'s of marketing, which are Product, Pricing, Place, Promotion, Packaging, Positioning & People. Product marketing, as opposed to product management, deals with more outbound marketing tasks (in the older sense of the phrase). For example, product management deals with the nuts and bolts of product development within a firm, whereas product marketing deals with marketing the product to prospects, customers, and others. Product marketing, as a job function within a firm, also differs from other marketing jobs such as marketing communications ("marcom"), online marketing, advertising, marketing strategy, public relations, etc. A Product market is something that is referred to when pitching a new product to the general public. The people you are trying to make your product appeal to is your consumer market. For example: If you were pitching a new video game console game to the public, your consumer market would probably be the adult male Video Game market (depending on the type of game). Thus you would carry out market research to find out how best to release the game. Likewise, a massage chair would probably not appeal to younger children, so you would market your product to an older generation. b)Real options valuation, also often termed real options analysis, (ROV or ROA) applies option valuation techniques to capital budgeting decisions. A real option itself, is the right — but not the obligation — to undertake certain business initiatives, such as deferring, abandoning, expanding, staging, or contracting a capital investment project. For example, the opportunity to invest in the expansion of a firm's factory, or alternatively to sell the factory, is a real call or put option, respectively. Real options are generally distinguished from conventional financial options in that they are not typically traded as securities, and do not usually involve decisions on an underlying asset that is traded as a financial securit. c)ROV is often contrasted with more standard techniques of capital budgeting, such as discounted cash flow (DCF) analysis / net present value (NPV). Using a DCF model, only the expected cash flows are considered, and the "flexibility" to alter corporate strategy in view of actual market realizations is "ignored"; see Valuing flexibility under Corporate finance. The NPV framework (implicitly) assumes that management is "passive" with regard to their Capital Investment once committed. Some analysts account for this uncertainty by adjusting the discount rate (e.g. by increasing the cost of capital) or the cash flows (using certainty equivalents, or applying (subjective) "haircuts" to the forecast numbers). Even when employed, however, these latter methods do not normally properly account for changes in risk over the project's lifecycle and hence fail to appropriately adapt the risk adjustment. By contrast, ROV assumes that management is "active" and can continuously respond to market changes. Real options consider each and every scenario and indicate the best corporate action in any of these contingent events. Because management adapts to each negative outcome by decreasing its exposure and to positive scenarios by scaling up, the firm benefits from uncertainty in the underlying market, achieving a lower variability of profits than under the commitment/NPV stance. The contingent nature of future profits in real option models is captured by employing the techniques developed for financial options in the literature on contingent claims analysis. First, corporate strategy has to be adaptive to contingent events. Some corporations face organizational rigidities and are unable to react to market changes; in this case, the NPV approach is appropriate. Second, if the firm can actively adapt to market changes, it remains to determine the right paradigm to discount future claims. Here the approach, known as risk-neutral valuation, consists in adjusting the probability distribution for risk consideration, while discounting at the risk-free rate. This contrasts with the standard NPV or WACC approach which discounts future expected cash flows under the empirical probability measure at a discount rate that reflects the embedded risk in the project. This technique is also known as the certainty-equivalent or martingale approach, and uses a risk-neutral measure. For technical considerations here, see below. Given these different treatments, the real options value of a project is typically higher than the NPV – and the difference will be most marked in projects with major flexibility, contingency, and volatility. (As for financial options higher volatility of the underlying leads to higher value).
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