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License valuation in the aerospace industry: A real options approach
Author(s) -
Miller Luke,
Bertus Mark
Publication year - 2005
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2005.04.001
Subject(s) - valuation (finance) , license , discounted cash flow , aerospace , cash flow , business , actuarial science , valuation of options , finance , economics , risk analysis (engineering) , computer science , engineering , aerospace engineering , operating system
This paper discusses a practical case application of real options applied to license valuation in the aerospace maintenance, repair, and overhaul industry. After categorizing the available licensing opportunities of the firm, four distinct licensing classes are identified: traditional delay licenses, contingent investment licenses, licenses with cost uncertainties, and indefinite delay licenses. Due to the varying nature of the classes, accepted real option valuation techniques are applied to include the European call, dual asset, exchange, and perpetual option. Appropriate sensitivity analyses and discussion for each license class provide guidelines for decision‐making. In general, it is shown that the real options framework captures value overlooked by discounted cash flow approaches.