NPV project clarity

[mwvt9]

cfasf1 Wrote:
——————————————————-
> this isn’t good for my mental health. WTF IS THE
> ANSWER??!!
We will find out in August.

 

[akanska]

mwvt9 Wrote:
——————————————————-
> cfasf1 Wrote:
> ————————————————–
> —–
> > this isn’t good for my mental health. WTF IS
> THE
> > ANSWER??!!
>
>
> We will find out in August.
NOT !!

 

[mwvt9]

akanska Wrote:
——————————————————-
> mwvt9 Wrote:
> ————————————————–
> —–
> > cfasf1 Wrote:
> >
> ————————————————–
>
> > —–
> > > this isn’t good for my mental health. WTF IS
> > THE
> > > ANSWER??!!
> >
> >
> > We will find out in August.
>
>
> NOT !!
On a whole you will. I will bet the farm on that….

 

[cfasf1]

i only need the answer to one question in august.

 

[slouiscar]

That makes sense caspian. Sorry, I read the other thread and felt it was quite unclear. I would add, I did not recall practice problems or the text digging into the concept that if a project begins tomorrow the NPV is X. If it begins next week it’s NPV is NPV/(1+r)^1/52
Of course it seems logical.
over05 Wrote:
——————————————————-
> NPV for net PRESENT value…you can’t say the npv
> is the same in one year or 100 years…npv is the
> value NOW.
Actually, I would have said that the NPV is the project’s net present value at t=0. I am unfamiliar with “over05’s Law of Time Value” that demands that t=0 must be “NOW”
The project is the project. It dudn’t change. outflow @ t=0, inflows @ t=1 through t=5.
The delay does not result in an outflow @ t=0, then inflows @ t=2 through t=6 (or @ t=101 through t=105).
So if tomorrow is t=0 or next year is t=0 the projects NPV at that time is the same. It is positive in this example and therefore I do not adjust the project’s NPV for the delay. I just delay acceptance until funds are raised or other requirements are met.
thx for the help, no more from me on this I promise.

 

[caspian]

Truthfully, it could’ve been a real option question and everyone who thinks you DO take it into consideration is wrong. But the consensus is that it was merely looking for a delay in the start of cash flows, and thus a reduction in NPV.

 

[Dwight]

caspian Wrote:
——————————————————-
> Truthfully, it could’ve been a real option
> question and everyone who thinks you DO take it
> into consideration is wrong. But the consensus is
> that it was merely looking for a delay in the
> start of cash flows, and thus a reduction in NPV.
Pretty sure it was an option based on the wording of the question.
“Management is considering delaying the project until next year to have the results from the test market sales of the prototype.”
Sounds an aweful lot like: “Timing options allow management to delay making an investment with the hope of having better information in the future.”

 

[dinesh.sundrani]

so does that mean it’s a Real Option and we won’t need to consider it, since the NPV was already +ve?

 

[slouiscar]

Either way good stuff. Thx.
For me it came down to this: A delay of CF definitely reduces NPV. But a delay of a whole project.? I was not sure. When accepted, that project has the same +NPV at acceptance. The project was not changed since the initial investment was delayed as well.
sorry I promised.

 

[Dwight]

dinesh.sundrani Wrote:
——————————————————-
> so does that mean it’s a Real Option and we won’t
> need to consider it, since the NPV was already
> +ve?
Unfortunately not. The option would change the value of the project. Think about it intuitively.
“Real options allow managers to make future decisions that change the value of capital budgeting decisions made today.”
Case 1: You absolutely have to do a project now or never.
Case 2: You have the option to do a project now or you can postpone it a year and do some research to improve your chance of success.
Obviously the option makes the project more valuable. If you are 95% sure that your project will be a success, then do it today and lock in those gains. If you are not so sure, use your option and research it for another year.

 

[mwvt9]

I now think that I missed this question. It makes sense that they would be testing the option value not just pushing back the cash flows. As Dwight points out the delay resulted in more information about the cash flows which is valuable to the firm.
Pretty sure I failed CF based on the discussions here (along with ethics and maybe FI). I wished I still felt as good as I did when I left the exam….but that is long gone.