Growth Options
In practice managers may accept investment projects that have navigate or significant NPV, but may enable companies to find opportunities to find opportunities in the future that add considerable profitability and value. These projects are said to have Growth Options. examples of Growth Options in clued an initial investment in a new market with the intention to expand later on, investment in research and development to develop possible new technology and product, carrying out an expensive advertisement campaign to push sales, acquisition of a patent to have protected returns acquiring rights over a copper mine, or acquiring a vacant land to develop it in the future. Such investments’ are called strategic since they define the Competitive position of the form. Options to expand are useful for achieving the future growth. Such options allow the firm to make future investments later on if the business conditions are favorable. The advantage of making investment in stages, rather than at once, is that the firm gains knowledge about the project’s true profitability and collects information that may help to unravel uncertainty surrounding the project. Option to expand in the future or make investment in stages provides the manufacturing and marketing flexibility to the firm.
Valuing Patent
Patents give valuable options to firm to achieve growth and create value. Firms, through research and development efforts, can develop technology, products or services and can patent them. A patent allows a firm to have exclusive rights for certain number of years to develop and market a product or service. Thus, patent may be viewed as a call option. A firm will develop the product only if it creates values; that is, the present value of cash inflows exceeds the cost of introducing the product.
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