Net Present Value of Growth Opportunities (NPVGO)

What Is the Net Present Value Of Growth Opportunities (NPVGO)?

The net present value of growth opportunities (NPVGO) is a calculation of the net present value per share of all future cash flows engaged with growth opportunities like new projects or possible acquisitions. The net present value of growth opportunities is utilized to decide the intrinsic value per share of these growth opportunities to decide the amount of the company's current per-share not entirely set in stone by them.

NPVGO is calculated by taking the projected cash inflow, discounted at the association's cost of capital, less the initial investment or purchase price of the project or asset.

Figuring out Net Present Value of Growth Opportunities (NPVGO)

A company's share price might be considered the value per share of present and future earnings discounted by the company's cost of capital. Utilizing the dividend discount model, NPVGO might be utilized to segment that value into the portion that is due to its current earnings and the portion that is due to its earnings from its future growth opportunities. Discounting current earnings per share by the cost of capital will give the value per share of the company's current earnings. Discounting the cash flows expected from growth opportunities will give the value per share due to those growth opportunities.

Along these lines, NPVGO can be utilized to decide the incremental value of an acquisition or new project. It very well may be utilized to arrange the price of an acquisition or decide any value the market could provide for that company's future growth.

Be that as it may, NPVGO depends on projections, so analysts should avoid nonstandard cash flows, for example, earnings in light of discontinued operations or earnings in view of nonrecurring operations, from those projections. If not, the projections could be slanted. Accurate projections are vital on the grounds that they can be so persuasive in pursuing key business choices.

Moreover, the most common way of deciding if a NPVGO is high or low should be attempted in an industry setting. Technology, capital, and different factors that go into working out the NPVGO of a specific company will rely upon the sector where it operates. Valuations will quite often be incredibly industry-specific, and industry standards should be thought about while working out a NPVGO.

Illustration of Net Present Value of Growth Opportunities (NPVGO)

For instance, expect that the intrinsic value of a company's stock is $64.17. In the event that a company's cost of capital is 12% and earnings per share are $5, then the value of those current earnings is $5/.12 = $41.67.

In the event that the expected earnings per share from future growth opportunities is $.90, and the growth rate (g) is 8%, then, at that point, the value of those earnings is $0.90/(.12 - .08) = $22.50.

The intrinsic value per share of the company is the value per share due to current earnings and the value due to future growth opportunities: $41.67 + $22.50 = $64.17.