How can you evaluate a potential investment if there are several possibilities to change the
course of action in the future depending on different emerging situations? And even more
challenging: How can you do so if you cannot come up with point estimates - but you have to use
several ranges of input values? Both - managerial flexibility as well as so called continuous
uncertainty - are highly relevant as they reflect most of the investment decisions
realistically. But if you apply standard valuation techniques like a simple Discounted Cash
Flow model the computed value will be significantly distorted potentially prompting you to
make a wrong decision. Given the practical urgent need for a suitable valuation technique the
real option valuation approach was developed as an advanced valuation approach. It follows a
non-trivial but doable four-step process quantifying the value of investments in situations of
managerial flexibility and continuous uncertainty. While real option valuation is considered to
be an opaque technique Ms. Kang proves that it can be explained in an understandable way even
for someone approaching the matter with limited or no prior exposure to the topic. The author
outlines the major issues of current product innovation valuation with traditional valuation
techniques. On the basis of this analysis she explains the basic concepts of valuing product
innovation through the use of real option valuation. Supported by a few practical examples the
author clarifies how to value different types of real options. So based on the actual Financial
Statement 2006 of Research In Motion (RIM) the author develops a sample 5-year business plan
for the product innovation of BlackBerry 9900. This is done through the highly advanced model
of Binomial Trees. Overall with this thesis you'll get a head-start into one of the more
advanced management tools - the real option valuation.
