The maximum per-film price for the sequel rights that Arundel Partners should pay is $5.12M.
If Arundel Partners were to use the traditional DCF methods to find the value of the sequel rights, the NPV would be -$8.42M loss per-film (see Appendix 1).
We assume that Arundel Partners will purchase a portfolio of films similar to one used in the analysis. The average hypothetical net inflow of the sequel ($21.57M) is used to figure out the value of the state variable for the real options model. The state variable is the average hypothetical net inflow of the sequel, discounted using a WACC of 12.36% back to 1989. Discounting back to 1989 is important because this is …show more content…
Further considerations for Real Options Valuation approach
Real options valuations recognise that the partners at Arundel obtain valuable information after the sequel rights have been purchased and the first films are released in the theatres. This additional information allows the partners to make informed actions in response, based on dynamic decision making. This approach allows for valuing real assets with some