What is Net Present Value of Growth Opportunities (NPVGO)?
Net Present Value of Growth Opportunities (NPVGO) is the simply the present value of additional cash flows associated with an acquisition, net of the purchase price of the acquisition. Essentially, the concept adds the present value of assets in place to the present value of the company's growth prospects. The required rate or return is typically the acquirer's weighted average cost of capital.
In general, the formula for NPVGO is:
How Does Net Present Value of Growth Opportunities (NPVGO) Work?
Let's assume Company XYZ is considering purchasing Company ABC. The shares of ABC are earning $1 per share and are trading at $20 per share. Company XYZ expects ABC's earnings to grow at 10% per year. If Company XYZ's required rate of return is 8%, then the net of purchasing Company ABC shares is:
NPVGO = $20 [(0.05 - 0.10) / (0.08 - 0.05)] = $33.33 per share
Why Does Net Present Value of Growth Opportunities (NPVGO) Matter?
Similar to the way the dividend discount model is used to determine the "correct" price of a stock based on its projected future cash flows, NPVGO is a way to determine the incremental value of a new project or . Additionally, NPVGO can be used to set the price or negotiate the price of a project or . It can also be used to derive what value the is giving to future growth for a certain stock or company.
However, the calculation is based on projections, which means those projections can be highly influential in key decisions, and the analyst must be sure to exclude nonrecurring , from discontinued operations and other nonstandard cash flows.
It is important to compare NPVGO in the context of a particular industry. Capital requirements, technology and other situations tend to be very industry-specific and thus the definition of high or low NPVGO should be made within this context.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
As an investor who loves to buy, hold and collect returns from my investments, I usually hate the idea of having to sell one of the stocks...Read More →