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Real Options I: Tests. A viable investment today?.

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A viable investment today?

A small start up company has come up with a new cell phone technology that promises to speed up download speeds and create a smoother interface. The cost of implementing the technology is expected to be $ 2 billion and the present value of the expected cash flows from it is only $1.5 billion. Should they implement the technology now?

- Yes
- No

Now assume that you work for an established cell phone manufacturer (Apple or Samsung). Would you be willing to pay for this non-viable technology, assuming that the company has patented it and has many years left on the patent life?

- Yes
- No

Explain.

Determinants of value…

Assuming that you would be willing to buy this non-viable technology, explain how each of the following will affect how much you would be willing to pay?

- Increase in number of years left on the patent life
- I would pay more
- I would pay less
- Higher uncertainty about future markets/ cash flows
- I would pay more
- I would pay less

Developing the technology…

Assume that you do buy the technology and that it becomes viable (PV of cash flows > Cost of implementation). Would you develop the technology immediately?

- Yes
- No

Explain. (What is the trade off that you are making?)

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