Involves a combination of techniques for describing patent valuation Includes descriptions of various topics, illustrative cases, step-by-step valuation techniques, user-friendly procedures and checklists, and examples Serves as a useable resource that allows IP managers to use actual or implied valuations when making patent-related decisions One of the most fundamental premises of the book is that these valuation skills can be made accessible to each of the various decision makers in the patent process.
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Patent Valuation involves narrative descriptions of the various topics, illustrative cases, step-by-step valuation techniques, user-friendly procedures and checklists, and an abundance of examples to demonstrate the more complex concepts. Murphy, John L. Advanced Search. Privacy Copyright. Title Patent valuation : improving decision making through analysis. Authors William J. Abstract A practical resource for valuing patents that is accessible to the complete spectrum of decision makers in the patent process.
If it invests next year, the discounted cash flows are 6M with a The investment cost is 4M. If the firm invests next year, the present value of the investment cost is 3. Following the net present value rule for investment, the firm should invest this year because the discounted cash flows 5M are greater than the investment costs 4M by 1M.
Yet, if the firm waits for next year, it only invests if discounted cash flows do not decrease. If discounted cash flows decrease to 3M, then investment is no longer profitable. If, they grow to 6M, then the firm invests.
Patent Valuation: Improving Decision Making through Analysis
This implies that the firm invests next year with a Thus the value to invest next year is 1. Given that the value to invest next year exceeds the value to invest this year, the firm should wait for further information to prevent losses. This simple example shows how the net present value may lead the firm to take unnecessary risk, which could be prevented by real options valuation. Staged Investment Staged investments are quite often in the pharmaceutical, mineral, and oil industries.
In this example, it is studied a staged investment abroad in which a firm decides whether to open one or two stores in a foreign country. This is adapted from "Staged Investment Example". The firm does not know how well its stores are accepted in a foreign country. If their stores have high demand, the discounted cash flows per store is 10M. If their stores have low demand, the discounted cash flows per store is 5M. It is also known that if the store's demand is independent of the store: if one store has high demand, the other also has high demand. The investment cost per store is 8M.
Should the firm invest in one store, two stores, or not invest? The net present value suggests the firm should not invest: the net present value is But is it the best alternative?
Following real options valuation, it is not: the firm has the real option to open one store this year, wait a year to know its demand, and invest in the new store next year if demand is high. The value to open one store this year is 7. Thus the value of the real option to invest in one store, wait a year, and invest next year is 0. Given this, the firm should opt by opening one store. This simple example shows that a negative net present value does not imply that the firm should not invest. Real options are also commonly applied to stock valuation - see Business valuation Option pricing approaches - as well as to various other "Applications" referenced below.
Where the project's scope is uncertain, flexibility as to the size of the relevant facilities is valuable, and constitutes optionality. Where there is uncertainty as to when, and how, business or other conditions will eventuate, flexibility as to the timing of the relevant project s is valuable, and constitutes optionality. This flexibility constitutes optionality. Given the above, it is clear that there is an analogy between real options and financial options ,  and we would therefore expect options-based modelling and analysis to be applied here.
At the same time, it is nevertheless important to understand why the more standard valuation techniques may not be applicable for ROV.
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Here, only the expected cash flows are considered, and the "flexibility" to alter corporate strategy in view of actual market realizations is "ignored"; see below as well as Corporate finance Valuing flexibility. The NPV framework implicitly assumes that management is "passive" with regard to their Capital Investment once committed. Some analysts account for this uncertainty by adjusting the discount rate, e. By contrast, ROV assumes that management is "active" and can "continuously" respond to market changes.
Real options consider "all" scenarios or "states" and indicate the best corporate action in each of these contingent events. The contingent nature of future profits in real option models is captured by employing the techniques developed for financial options in the literature on contingent claims analysis. Here the approach, known as risk-neutral valuation, consists in adjusting the probability distribution for risk consideration , while discounting at the risk-free rate. This technique is also known as the certainty-equivalent or martingale approach, and uses a risk-neutral measure.
For technical considerations here, see below. An application of Real Options Valuation in the Philippine banking industry exhibited that increased levels of income volatility may adversely affect option values on the loan portfolio, when the presence of information asymmetry is considered. In this case, increased volatility may limit the value of an option. However, studies have shown that these models are reliable estimators of underlying asset value, when input values are properly identified. Although there is much similarity between the modelling of real options and financial options ,   ROV is distinguished from the latter, in that it takes into account uncertainty about the future evolution of the parameters that determine the value of the project, coupled with management's ability to respond to the evolution of these parameters.
When valuing the real option, the analyst must therefore consider the inputs to the valuation, the valuation method employed, and whether any technical limitations may apply. Conceptually, valuing a real option looks at the premium between inflows and outlays for a particular project. Inputs to the value of a real option time, discount rates, volatility, cash inflows and outflows are each affected by the terms of business, and external environmental factors that a project exists in.
Terms of business as information regarding ownership, data collection costs, and patents, are formed in relation to political, environmental, socio-cultural, technological, environmental and legal factors that affect an industry. Just as terms of business are affected by external environmental factors, these same circumstances affect the volatility of returns, as well as the discount rate as firm or project specific risk.
Furthermore, the external environmental influences that affect an industry affect projections on expected inflows and outlays. Given the similarity in valuation approach, the inputs required for modelling the real option correspond, generically, to those required for a financial option valuation. The valuation methods usually employed, likewise, are adapted from techniques developed for valuing financial options.
In selecting a model, therefore, analysts must make a trade off between these considerations; see Option finance Model implementation. The model must also be flexible enough to allow for the relevant decision rule to be coded appropriately at each decision point. Various other methods, aimed mainly at practitioners , have been developed for real option valuation. These typically use cash-flow scenarios for the projection of the future pay-off distribution, and are not based on restricting assumptions similar to those that underlie the closed form or even numeric solutions discussed.
The most recent additions include the Datar—Mathews method   and the fuzzy pay-off method. These considerations are as below. As discussed above , the market and environment underlying the project must be one where "change is most evident", and the "source, trends and evolution" in product demand and supply, create the "flexibility, contingency, and volatility"  which result in optionality. Without this, the NPV framework would be more relevant.
Real options are "particularly important for businesses with a few key characteristics",  and may be less relevant otherwise. Limitations as to the use of these models arise due to the contrast between Real Options and financial options , for which these were originally developed. Finally, even if the firm can actively adapt to market changes, it remains to determine the right paradigm to discount future claims. Whereas business managers have been making capital investment decisions for centuries, the term "real option" is relatively new, and was coined by Professor Stewart Myers of the MIT Sloan School of Management in The description of such opportunities as "real options", however, followed on the development of analytical techniques for financial options , such as Black—Scholes in As such, the term "real option" is closely tied to these option methods.
Real options are today an active field of academic research. Professor Lenos Trigeorgis has been a leading name for many years, publishing several influential books and academic articles. An academic conference on real options is organized yearly Annual International Conference on Real Options.
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Amongst others, the concept was "popularized" by Michael J. Mauboussin , then chief U. Trigeorgis also has broadened exposure to real options through layman articles in publications such as The Wall Street Journal. Recently, real options have been employed in business strategy , both for valuation purposes and as a conceptual framework. Merton discussed the essential points of Arundel in his Nobel Prize Lecture in In particular, the investors must determine the value of the sequel rights before any of the first films are produced. Here, the investors face two main choices.
They can produce an original movie and sequel at the same time or they can wait to decide on a sequel after the original film is released.