QS Study

Sources of Positive Net Present Value

Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project.

The purpose of the net present value is to help analysts and managers decide whether or not new projects are financially viable. Essentially, net present value measures the total amount of gain or loss a project will produce compared to the amount that could be earned simply by saving the money in a bank or investing it in some other opportunity that generates a return equal to the discount rate. If a long-term project has a positive net present value, then it is expected to produce more income than what could be gained by earning the discount rate, which means the company should go ahead with the project.

Acquisitions of properties are carried out by corporate firms for development, investment, and operational uses. Acquisitions of corporate real estate announced by listed non-property companies are found to have positive stock price reactions. This paper seeks to identify the reasons why acquisitions of the corporate real estate are a positive net present value (NPV) investment to the acquiring firms.

Design/methodology/approach – This paper draws theoretical explanations from real estate and finance literature to identify the reasons for the acquisitions to be positive NPV investments to non-property listed companies.

Findings – The sources of gains in Property acquisitions are worth, marriage value and business synergy. These explanations provide the reasons why the announcement of property acquisitions by listed companies could lead to positive wealth gains in the capital market.

Originality/value – This paper offers the explanations behind the positive stock price reactions upon the announcements of corporate real estate acquisitions.