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?