The [[NPV]] can also be expressed as a quotient rather than a difference. Define
$\large \text{Net Present Value (NPV)}_q = \frac{\text{PV (expected cash flows)}}{\text{PV(capital expenditures)}}$
or
$\large \text{NPV}_q$ = $\Large \frac{S}{PV(X)}$

Using this way of expressing the NPV the rule becomes if $\large \text{NPV}_q$ >1 then invest, if $\large \text{NPV}_q$ < 1 then don't invest.

$\large \text{NPV}_q$ is used to determine if a call option should be exercised //''at expiration''//. By adding this condition $\large \text{NPV}_q$ combines four of five determinants of option value (see [[Options]]), The stock price $S$, the expenditure costs $X$, the [[Risk free rate of return]] (part of the denominator to discount the costs) and t.

<<image /static/files/MBI/Module%2013/npvq.png width:800>>

bag
finance_public
created
Sat, 04 Jun 2011 20:23:10 GMT
creator
dirkjan
modified
Sat, 04 Jun 2011 20:23:10 GMT
modifier
dirkjan
tags
Capital projects as real options
creator
dirkjan