- Difference between (traditional) NPV and an expanded or strategic NPV.
Net present value is an investment appraisal technique and is the difference between amount of cash inflows and total cash outflows related to a project or investment. It measures the present value of cash to the value of cash in the future by taking into account all the relevant costs including inflation and returns. Net present value is a pointer to the value a project or investment adds to the firm. NPV at WACC (cost of capital) may not include opportunity cost such as comparison with other available investments so this does not necessarily mean that they should be undertaken. If a choice exists between two mutually exclusive projects, then the one resulting in higher NPV should be chosen.
The primary step included in the estimation of NPV is the determination of the present estimation of project’s net cash inflows. There may be even net cash flows that are same cash flows in distinctive periods or uneven net cash flows that are distinctive cash flows in diverse periods. When they are even, present value can be effortlessly computed by utilizing the present value of annuity formula. On the other hand, in the event that they are uneven, we have to ascertain the present value of every individual net cash inflow independently. The second step includes subtraction of the beginning investment on the investment or project from the total present value of cash inflows in order to determine the net present value.
If NPV is greater than zero, it means that value will be added to the firm by the investment so the project should be accepted. If NPV is less than zero, it means that the investment will not add value to the firm so the project should be discarded. If NPV is equal to zero, it means that the investment will not have an effect on the value the firm so accepting or rejecting the project will be subjective and decision should be based on other criteria as this project will add no monetary value to the firm.
Net present value is more reliable because it considers time value of money as compared to other appraisal techniques, which do not discount future cash flows such as accounting rate of return and payback period. Results of NPV’s estimates may be far from actual results because it is based on future cash flows of the project.
Expanded or Strategic NPV is defined as the value of the real options into the valuation of an investment. The expanded or strategic NPV is equal to the value of real option plus the net present value of an investment on the project. The real options methodology to the capital financing decision gives an alternate understanding into the valuation of projects. Real options can confine the estimation of managerial flexibility, adaptability and strategic value, and give an instinct that may be as opposed to prominent consideration.
The real option is not an obligation but it is an alternative that becomes available for the company with the business investment opportunity to get the terrible present estimation of expected cash flows by making an irreversible financing at the latest date when the opportunity stops to be accessible. Real options just have esteem when speculation includes an irreversible cost in an uncertain environment. Furthermore, the advantageous asymmetry between the right and the commitment to contribute under these conditions is the thing that produces the choice's quality.
Real options concentrate on "dynamic complexity"; the evolution of a few complex factors about whether that focuses the estimation of venture and cash flows. These are elements about which decisions can be taken at anytime over a period.
Decision-tree analysis (DTA) has a tendency to consider extraordinary detail in the cash flow models and numerous vulnerabilities; however, it is moderately minimal in the method for element choice making that is "detail complexity". There are an extensive number of these variables with choices set aside a few minutes’ periods. Positive strategic NPV investments are relied upon to yield an overabundance return that will be more than the opportunity cost of capital. An option based strategic NPV joins the best features of both (DTA) decision tree analysis and the NPV without their detriments. Expanded NPV gets the utilization of decision nodes from the (DTA) in displaying adaptability while being more cautious about utilizing the NPV thought to properly price risk. An option based expanded NPV is a monetarily right form of an element programming procedure.
- 2. Global Airlines problems and the contemplated solutions
The last few years had been to a great degree troublesome for the global air lines. The early 200s retreat and the occasion of September 11, 2001 had put the entire air transport industry on the ...........................
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