Net Present Value Of Growth Opportunities - NPVGO

See: Net Present Value.

You run a business selling colored ostrich eggs for Easter. You have some money saved up and want to invest in the company’s growth. There are a few possible opportunities. You could buy a smaller rival that specializes in emu eggs. You could launch a new product, providing cooked ostriches for Thanksgiving dinners.

The stat known as net present value of growth opportunities lets you know which of these potential options to take. To use the figure, you calculate the net present value for each of the potential investments. The process basically boils down each opportunity into a single figure.

Once you have the NPVGO, making the decision becomes easy. If purchasing the emu egg distributor has a NPVGO of $15 million and the ostrich meat product has a figure of $20 million, the ostrich meat product becomes the obvious place to invest.

The NPVGO equation starts by estimating the amount of cash the opportunity will bring in. Then this figure is discounted to take into account a company's cost of capital (which represents the minimum return the company could get by not choosing any investment, and just loaning the money out at market rates). From this, subtract the amount it took to launch the opportunity (either the amount to purchase the competitor or the money you had to invest in the launch product).