Valuation under technological change

Valuation under technological change

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Article ID: iaor2000635
Country: United Kingdom
Volume: 50
Issue: 3
Start Page Number: 255
End Page Number: 261
Publication Date: Mar 1999
Journal: Journal of the Operational Research Society
Authors: ,
Keywords: budgeting
Abstract:

This paper presents a valuation model, which includes the possibility of a future change in technology that affects in the short term the level of net cash flows receivable. The user can consider the effects of such a change on the flows, depending on whether the company is an innovator itself, or a follower of the innovations of others. The model is based upon a number of assumptions. The cash flows before the technological breakthrough follow a geometric Brownian motion. The breakthrough is modelled by a Poisson jump. For the innovator, cash flows are boosted, then decline through competition. By contrast, for the technological follower the breakthrough has an immediate depressing effect on cash flows, but subsequent cash flows rise and are modelled by an upward logistic curve.

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