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# NPV vs real options

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Answer the below questions with at least five sentences each, >>>thoroughly and in your own words<<<

? Present the general decision rule for NPV. If a project has NPV = 0, should a manager accept the project?
? Define purchasing power parity. What is the importance of purchasing power parity to an analyst attempting to establish value for a company located in an emerging market.
? Why might inflation pose more problems in evaluating foreign firms than in evaluating a domestic business?
? Discuss some examples of political risks facing firms that are investing in other parts of the world.
? Why might there be an advantage in being a minority investor in an emerging market as contrasted to majority ownership?
? Why might the cost of capital be higher in emerging markets than in domestic ones?
? How can you use financial futures markets to hedge such risks as foreign exchange risk?
? Discuss the difference between NPV (net present value) and real options.

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? Present the general decision rule for NPV. If a project has NPV = 0, should a manager accept the project?
The general decision rule is that if NPV is greater than 0, accept the project and if the NPV is less than 0 reject the project. The method is to use the nominal discount rate to discount nominal cash flows and real discount rate to discount real cash flows. The general rule is to select the projects whose NPV is more than or equal to zero. However, the manager is required to arrange a number of projects in the descending order of the NPVs. He should start selecting projects from the top of the list and continue selecting till the capital budget allows him. So, the chances of selection of a project with NPV = 0 is lower than the projects with a higher NPV. However, in a situation where there is only one project and that project has NPV = 0, it should be selected. Remember, NPV = 0 is the Internal Rate of Return.
? Define purchasing power parity. What is the importance of purchasing power parity to an analyst attempting to establish value for a company located in an emerging market?
The general meaning of purchasing power parity is that the exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries. if an analyst is trying to establish value for a company located in an emerging market, he has to take into consideration the inflation in the emerging market. The analyst has to depreciate the country's exchange rate so that he returns to purchasing power parity. The law of one price needs to be established by the analyst trying to establish value for the company located in an emerging market. Typically, an emerging market is a growing economy and so has a high inflation rate. An easier method that is being used by analysts is to use relative purchasing power party the price ...

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## NPV & Real Options

The cash flows are \$8.5 million at the end of year 1, end of year 2, etc., "forever".

An ordinary perpetuity assumes payment at the end of the year, so the \$85 million does not need further discounting -- we're evaluating everything as of "today".

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