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STEP 4

IDENTIFY DIFFERENT OPTIONS TO SOLVE THE PROBLEM

BY:
GUSTAVO LONDOO
COD. 1110533886

FOR:
KARLA NATHALIA TRIANA

UNIVERSIDAD NACIONAL ABIERTA Y A DISTANCIA


ESCUELA DE CIENCIAS BASICAS, TECNOLOGIA E INGENIERIA
INGENIERIA INDUSTRIAL
2017
ABSTRACT

This document is part of phase 4 of the technology assessment and negotiation course,
which investigates the methods of valuation of real operations, which allow to evaluate an
investment project, so they can be very useful, when it comes to obtaining business
benefits.
The first part of the paper, allows the theoretical description of the methods of valuation of
real operations, stipulating their advantages and disadvantages, and in which case they
should be used.
The second part of the document contains a description of methods of valuation of real
methods, in a technological project using a real example.
Then the final part of the paper refers to the explanation of the question: Why is it
important to value technological innovations and if, by creating economic value from this,
do developing countries have the opportunity to eradicate poverty?
REAL OPTION METHODS

The term of real options was established by Stewar Myers in 1977 to refer to the
application of option theory in the valuation of non-financial assets, specifically to
investment in real assets that would have a flexibility component such as investment In
research and development and in the expansion of manufacturing plants.

Real options are a method for valuing investment projects that starts from the premise that
real investment projects can resemble financial options (call and put) and not a portfolio of
risk-free bonds such as the VPN, which leaves Of being useful when situations arise in
which the project does not necessarily have to be carried out immediately, ie, be fulfilled
later or in parts. In other words, the real options approach is the extension of the Financial
Options Theory to options in real (non-financial) assets that allow to modify a project with
the intention of increasing its value.
Real options allow you to add value to the business by increasing profits or reducing losses.
Often the term option is not used to describe these opportunities, rather they are referred to
as intangibles rather than as call or put options, but when evaluating important investment
proposals, these intangible options are often the key to the decisions.
Option pricing models are based on consideration of the following variables: price of the
underlying asset, exercise price, time to expiration, interest rate and market volatility.

CHARACTERISTICS OF THE METHODS OF REAL VALUATION:


expected values of cash flows
cost of investment
uncertainty about project prices
timeframe until the opportunity disappears
maintenance of the option
their value depends on the expected revaluation of cash flows
risk-free interest rate
TYPES OF REAL METHODS:

1. Option to alter the scale of operation


This option is divided by:
Expand or expand. The option of expanding production or operating scale of a
project if the conditions are favorable, or decreasing it if unfavorable, is a real
option equivalent to a US call option. Among the options for expansion are the
possibility of choosing the size or dimension and of making continuous investments
(investment by stages).
Contract. If the conditions turn out to be negative, the company can make the
decision to operate with a smaller size than the existing one, that is to say, with less
productive capacity. This decision would allow the company to reduce or save some
of its costs. This option can be compared with a put option on part of an initially
planned project whose strike price is the potential costs saved.
Stop and restart or temporary closure of operations. Sometimes companies have the
possibility to temporarily stop their productive activities when the income obtained
is not sufficient to cover the variable costs of operation and then start again when
the situation is more favorable. Closing or stopping activities also involves costs, as
well as restarting

2. OPTION OF ABANDONING OR CLOSING DEFINITIVELY THE


OPERATIONS

It should be divested when the project is not economically justified. Once the
project is no longer profitable, the company will cut its losses and exercise
this option to abandon the project. This real settlement option provides partial
insurance against failures and is formally equivalent to a US put option with
an exercise price equal to the sale value of the project.
The total value of a project must consider its abandonment value, which is
generally not known at the time of its initial evaluation, but depends on its
evolution in the future. There are two important issues to consider in analyzing
the value of abandonment:
The need to take it into account, in some way, in the investment decision.
The determination of the time or interval of time in which said value of abandonment
reaches its maximum value.

3. OPTION TO WAIT:

The company can wait a certain time for some market conditions (especially
the price of the product) to change in a way that justifies the investment
project. Equivalent to owning a purchase option on a particular project.

WHY IS IT A RECOMMENDED TO USE REAL OPTION METHODS BEYOND


TRADITIONAL METHODS OF VALUATION TO ASSESS INTANGIBLE
ASSETS?

This type of method is used for the valuation of intangible assets, because this indicates the
current heat of the adjacent real asset, ie the current value of the cash flows expected to be
obtained from that asset over its future life.

WHY IS IT IMPORTANT TO ASSESS TECHNOLOGICAL INNOVATIONS AND


IF, BY CREATING ECONOMIC VALUE THEREFORE, DOING DEVELOPING
COUNTRIES HAVE THE OPPORTUNITY TO ERADICATE POVERTY?

It is important to evaluate the technological innovations, because first the investment are
quite high, and many times to fulfill it, we resort to methods of financing therefore, it is
necessary to evaluate or evaluate such investment, in order to be sure to apply the right
option And that will be a good project. When applying this type of valuation methods for
technological investment, the benefits of the application of the technology are taken into
account, and this allows us to visualize the project as a system, and then allows us to
evaluate the consequences of the same.
Investing in technology, either in production or industry, can result in a growth of industry,
and this can benefit the country's economy, because then employment and an increase in
per capita GDP of countries are generated, improving The power acquisito of the settlers.
CONCLUSIONS

The methods of valuation by real options consists of making a comparison between the
value of the project in the situation in which there is no possibility of waiting to make a
decision, with the value of the same in the case of having it. The value when there is no real
option is calculated from the same in the case as done with the traditional valuation,
calculating the possibility, u the value with real option is done in the same way but deriving
each term from the decision tree. The difference between them is the most accurate value of
the real option.
BIBLIOGRAPHY

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=32100351
&lang=es&site=eds-live

Garca-Delgado, D. (July 1, 2014). The evolution of negotiations of intangible assets


apart from industrial property protection in biotechnology. Biotecnologia Aplicada.
Retrieved from:
http://bibliotecavirtual.unad.edu.co:2051/login.aspx?direct=true&db=edselc&AN=edselc.2-
52.0-84938803564&lang=es&site=eds-live

Kang, Y. (2009). Real Option Valuation of Product Innovation. Retrieved from:


http://bibliotecavirtual.unad.edu.co:2051/login.aspx?direct=true&db=nlebk&AN=793059&
lang=es&site=eds-live

Sutherland, A., Williams, J. . (2010). Valuing Real Options: Insights from


Competitive Strategy. Thomas, Rawley, Gup, Benton E. The Valuation Handbook :
Valuation Techniques From Today's Top Practitioners (pp 334 366). Hoboken, New
Jersey. Retrieved from:
http://bibliotecavirtual.unad.edu.co:2051/login.aspx?direct=true&db=nlebk&AN=294473&
lang=es&site=eds-live