Understanding NPV & Real Options

Understanding NPV & Real Options

This discussion has 2 parts:

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?
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.

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