Question

his discussion has 2 parts:

1. Understanding what the net present value (NPV) tells us.
   • The NPV decision rule says to accept the project if the NPV is greater than zero. You perform a thorough capital budgeting analysis on a project that requires a $1,000,000,000 initial investment and calculate the net present value (NPV) as $1. Following the rule, you tell your boss she should accept the project. She laughs and says “do you think I would really invest $1,000,000,000 for a measly $1 NPV? You should be fired” How would you respond to her?
     
2. Real Options
   • Give two examples of “real options” that you have come across in your professional life, or that may come up in projects in a business you wish to start, or that may come up in the projects at a company in which you hope to be employed.

PLEASE COME UP WITH AN ORIGINAL ANSWER NO COPY AND PAST FROM OTHERS

Answer 1

Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over the life of the project.

NPV= Present value of cash inflows - Present value of cash outflows

So NPV takes into accounts all the cash flows (both negative and positive) during the life of the projects which are discounted by the by the desired/expected rate of return.

Discount rate takes in to account the Time value of money, expectations of the stakeholders and risk associated with the project.

So in the given case NPV is $ 1which means there will be the additional return of $ 1 from project over and above the desired return/expected return. So as per the NPV rule if NPV >0 company will make additional profit over and above the desired return.

Two real option of business

Currently due to pandemic a lot of industry are passing through stress and are try to sustain the business. In such scenario, if an investment can be made at discounted price it will provide good return in future

1)One of the fast food restaurant owner is trying to exit the business at discounted price which can be bought.

2)I have seen the printing and press is good industry, so one can open a printing press and photocopy station mainly targeting colleges, school both students and professors might be interested in the same.