OPTION WORKSHEET:PATENT AS OPTION

VALUING A PRODUCT PATENT/PROJECT AS AN OPTION

This program calculates the value of a product patent or

a project as an option.

Assumptions
1. All the assumptions underlying the Black-Scholes model apply
2. The current value of the project and the variance in this value are known.

The user has to input the following variables

1. Present value of net cashflows from taking project now.
2. Variance in the present value, as a function of environmental and technical changes.
3. Present value of the cost of developing the product/project for commerical use.
4. Riskless interest rate that corresponds to length of the product patent.
5. Length of the product patent / rights to the project.
6. Expected annual after-tax cashflow from project after it is developed.
 OPTION WORKSHEET:PATENT AS OPTION

Inputs relating the underlying asset

Enter the present value of net cashflows from taking project now =$800,000

Enter the standard deviation in the present value of project cashflows

30.00%
=

Inputs relating to the option

Enter the present value of the cost of developing product/project =
$1,000,000 (in currency)

Enter the life of the product patent / project rights = 10 (in years)

As a default, we will assume that you if you do not invest in the project once it becomes viable, you will lose one year of protection and that
your cash flows will decline proportionately (1/remaining life of the patent)
Do you want to change this default? No
If so, enter the expected annual cost of delaying investment (as % of value)
General Inputs
Enter the riskless rate that corresponds to the option lifetime = 8.00%
 OPTION WORKSHEET:PATENT AS OPTION

VALUING A LONG TERM OPTION/WARRANT

Stock Price= $800,000 T.Bond rate= 8.00%
Strike Price= $1,000,000 Variance= 0.09
Expiration (in years) = 10 Annualized dividend yield= 10.00%

d1 = 0.03
N(d1) = 0.51

d2 = -0.92
N(d2) = 0.18

Value of the product patent/project right = $70,185

OPTION WORKSHEET:PATENT AS OPTION
 OPTION WORKSHEET:PATENT AS OPTION

ar of protection and that

OPTION WORKSHEET:PATENT AS OPTION