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Summary

The value of a firm or an investment in a traditional discounted cash flow framework is the present value of the expected cash flows. In the process, however, you might ignore the options to delay or expand that are often embedded in firms.

Two types of options can influence the value of a technology firm. The first is the option to delay investing in a technology or project. When a firm has the exclusive rights to a project, even one with a negative net present value, it can hold back on investing until the project becomes an attractive one and can choose not to invest if this never happens. Consequently, the value of the rights to invest in this type of investment will often exceed the discounted cash flow value of the investment and can be estimated with an option pricing model. In fact, the value of a patent or patents owned by a firm can be estimated with the same approach and added on to the value of the cash flows generated by the more conventional assets of the firm to arrive at firm value.


  

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