【正文】 s NPV turns positive in this section Aswath Damodaran 48 An example: A Pharmaceutical patent ? Assume that a pharmaceutical pany has been approached by an entrepreneur who has patented a new drug to treat ulcers. The entrepreneur has obtained FDA approval and has the patent rights for the next 17 years. ? While the drug shows promise, it is still very expensive to manufacture and has a relatively small market. Assume that the initial investment to produce the drug is $ 500 million and the present value of the cash flows from introducing the drug now is only $ 350 million. ? The technology and the market is volatile, and the annualized standard deviation in the present value, estimated from a simulation is 25%. Aswath Damodaran 49 Valuing the Patent ? Inputs to the option pricing model ? Value of the Underlying Asset (S) = PV of Cash Flows from Project if introduced now = $ 350 million ? Strike Price (K) = Initial Investment needed to introduce the product = $ 500 million ? Variance in Underlying Asset’s Value = ()2 = ? Time to expiration = Life of the patent = 17 years ? Dividend Yield = 1/Life of the patent = 1/17 = % (Every year you delay, you lose 1 year of protection) ? Assume that the 17year riskless rate is 4%. The value of the option can be estimated as follows: ? Call Value= 350 exp()(17) () 500 (exp()(17) ()= $ million Aswath Damodaran 50 Insights for Investment Analyses ? Having the exclusive rights to a product or project is valuable, even if the product or project is not viable today. ? The value of these rights increases with the volatility of the underlying business. ? The cost of acquiring these rights (by buying them or spending money on development Ramp。 of $91,097 yields a present value of $24,785. Aswath Damodaran 42 Case 2: Synergy in a merger.. ? Earlier, we valued Sensient Technologies for an acquisition by Tata Chemicals and estimated a value of $ 1,559 million for the operating assets and $ 1,107 million for the equity in the firm. In estimating this value, though, we treated Sensient Technologies as a standalone firm. ? Assume that Tata Chemicals foresees potential synergies in the bination of the two firms, primarily from using its distribution and marketing facilities in India to market Sensient’s food additive products to India’s rapidly growing processed food industry. ? It will take Tata Chemicals approximately 3 years to adapt Sensient’s products to match the needs of the Indian processed food sector – more spice, less color. ? Tata Chemicals will be able to generate Rs 1,500 million in aftertax operating ine in year 4 from Sensient’s Indian sales, growing at a rate of 4% a year after that in perpetuity from Sensient’s products in India. Aswath Damodaran 43 Estimating the cost of capital to use in valuing synergy.. ? To estimate the cost of equity: ? All of the perceived synergies flow from Sensient’s products. We will use the levered beta of of Sensient in estimating cost of equity. ? The synergies are expected to e from India。 investments in the inventory are made at the beginning of each year. ? The tax rate for Bookscape as a business is 40% and the cost of capital for Bookscape is %. Aswath Damodaran 40 NPV of Caf233。 later investment Aswath Damodaran 36 Opportunity Cost of Excess Capacity Year Old New Old + New Lost ATCF PV(ATCF) 1 % % % $0 2 % % % $0 3 % % % $0 4 % % % $5,115 $ 3,251 5 % % % $38,681 $ 21,949 6 % % % $75,256 $ 38,127 7 % % % $115,124 $ 52,076 8 % % % $158,595 $ 64,054 9 100% % % $177,280 $ 63,929 10 100% % % $186,160 $ 59,939 PV(Lost Sales)= $ 303,324 ? PV (Building Capacity In Year 3 Instead Of Year 8) = 1,500,000/ 1,500,000/ = $ 461,846 ? Opportunity Cost of Excess Capacity = $ 303,324 Aswath Damodaran 37 Product and Project Cannibalization: A Real Cost? Assume that in the Disney theme park example, 20% of the revenues at the Rio Disney park are expected to e from people who would have gone to Disney theme parks in the US. In doing the analysis of the park, you would a) Look at only incremental revenues (. 80% of the total revenue) b) Look at total revenues at the park c) Choose an intermediate number Would your answer be different if you were analyzing whether to introduce a new show on the Disney cable channel on Saturday mornings that is expected to attract 20% of its viewers from ABC (which is also owned by Disney)? a) Yes b) No Aswath Damodaran 38 B. Project Synergies ? A project may provide benefits for other projects within the firm. If this is the case, these benefits have to be valued and shown in the initial project analysis. ? Consider, for instance, a typical Disney animated movie. Assume that it costs $ 50 million to produce and promote. This movie, in addition to theatrical revenues, also produces revenues from ? the sale of merchandise (stuffed toys, plastic figures, clothes ..) ? increased attendance at the theme parks ? stage shows (see “Beauty and the Beast” and the “Lion King”) ? television series based upon the movie Aswath Damodaran 39 Example 1: Adding a Caf233。 it is expected to grow 5 percent a year after that for the remaining three years of the online venture. After the online venture is ended in the fourth year, the manager’s salary will revert back to its old levels. ? It is also estimated that Bookscape Online will utilize an office that is currently used to store financial records. The records will be moved to a bank vault, which will cost $1000 a year to rent. Aswath Damodaran 32 NPV with side costs… Additional salary costs Office Costs NPV adjusted for side costs= 98,775 $29,865 $1405 = $130,045 Opportunity costs agg