License valuation in the aerospace industry: A real options approach

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. (C) 2005 Elsevier Inc. All rights reserved.