The net present value of a growth opportunity,NPVGO,can be defined as: A) the initial investment necessary for a new project. B) the net present value per share of an investment in a new project. C) a continual reinvestment of earnings when r g. E) None of these.

Question

The net present value of a growth opportunity,NPVGO,can be defined as:
A) the initial investment necessary for a new project.
B) the net present value per share of an investment in a new project.
C) a continual reinvestment of earnings when r < g.
D) a single period investment when r > g.
E) None of these.

Quizplus · Accepted Answer

The net present value of a growth opportunity (NPVGO) is the difference between the net present value of a company’s expected future earnings with the growth project and the net present value of its expected future earnings without the growth project, divided by the cost of equity. In other words, it is the additional value that a new project can bring to a company per share of stock. Therefore, the NPVGO is represented as the net present value per share of an investment in a new project.

The Net Present Value of a Growth Opportunity,NPVGO,can Be Defined