Difference between revisions of "NPV q"

Revision as of 18:39, 27 August 2020

NPV_q

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-The [[NPV|NPV]] can also be expressed as a quotient rather than a difference. Define
+NPV_q
-<math>\text{Net Present Value (NPV)}_q = \frac{\text{PV (expected cash flows)}}{\text{PV(capital expenditures)}}</math>
-or
-<math>\text{NPV}_q</math> = <math>\frac{S}{PV(X)}</math>
-Using this way of expressing the NPV the rule becomes if <math>\text{NPV}_q</math> >1 then invest, if <math>\text{NPV}_q</math> < 1 then don't invest.
-<math>\text{NPV}_q</math> is used to determine if a call option should be exercised '''''at expiration'''''. By adding this condition <math>\text{NPV}_q</math> combines four of five determinants of option value (see [[Options|Options]]), The stock price <math>S</math>, the expenditure costs <math>X</math>, the [[Risk free rate of return|Risk free rate of return]] (part of the denominator to discount the costs) and t.
-<html><img src = "/static/files/MBI/Module%2013/npvq.png" width="800"/></html>
 [[Category:finance]]
 [[Category:Capital projects as real options]]