Window of opportunity

Examples of Window of opportunity in the following topics:

• Window of Opportunity

  • In corporate finance, a "window of opportunity" is the time when an asset or product which is unattainable will become available.
  • In corporate finance, a "window of opportunity" basically is the idea of a time when an asset or product that is unattainable will become available.
  • Therefore, the IPO presents a window of opportunity to the potential investor to get in on the new equity while it is still affordable and a greater return on investment is attainable.
  • From the firm side, the opportunity to purchase a new plant or real estate at a cheap cost or lower lending rates also presents an opportunity to attain a greater investment on assets used in production.
  • Management of a firm must take this into account in order to keep costs low and returns high, in order to make the firm look like the best possible investment for creditors of all types.

• Replacement Projects

  • The possibility of replacement projects must be taken into account during the process of capital budgeting and subsequent project management.
  • The net cash flows for a project take into account revenues and costs generated by the project, along with more indirect implications, such as sunk costs, opportunity costs and depreciation costs related to the project.
  • All of these considerations taken together allow management to consider the project's incremental cash flows, which are inflows and outflows the project produces over predictable periods of time.
  • In general, there will be some sort of cash inflow from ending the old project -- for example, from the terminal value realized upon the sale of existing equipment -- and a subsequent cash outflow to begin the new project.
  • The loss of expected future cash flows from the previous project, or opportunity cost, must also be taken into account.

• Opportunity Costs

  • Opportunity cost is the cost of any activity measured in terms of the value of the next best alternative forgone (that is not chosen).
  • Opportunity cost is a key concept in economics; it relates the scarcity of resources to the mutually exclusive nature of choice.
  • Opportunity cost is assessed not only in monetary or material terms, but also in terms of anything which is of value to the decision maker.
  • In a restaurant situation, the opportunity cost of eating steak could be trying the salmon.
  • The opportunity cost of having happier children could therefore be a remodeled bathroom.

• Understanding the Cost of Money

  • The cost of money is the opportunity cost of holding money instead of investing it, depending on the rate of interest.
  • The concept of the cost of money has its basis, as does the subject of finance in general, in the time value of money.
  • Furthermore, the time value of money is related to the concept of opportunity cost.
  • The cost of money is the opportunity cost of holding money in hands instead of investing it.
  • The cost of money is the opportunity cost of holding money in hands instead of investing it.

• Disadvantages of the NPV method

  • NPV is hard to estimate accurately, does not fully account for opportunity cost, and does not give a complete picture of an investment's gain or loss.
  • There are a number of disadvantages to NPV.
  • Furthermore, the NPV is only useful for comparing projects at the same time; it does not fully build in opportunity cost.
  • NPV does not build in the opportunity cost of not having the capital to spend on future investment options.
  • Another issue with relying on NPV is that it does not provide an overall picture of the gain or loss of executing a certain project.

• Other Considerations in Capital Budgeting

  • Traditional capital budgeting theory holds that investments should be made when the simple net present value (NPV) of an investment opportunity equals or exceeds zero.
  • The notion of real options was developed from the idea that one can view firms' discretionary investment opportunities as a call option on real assets, in much the same way as a financial call option provides decision rights on financial assets.
  • Real investments are often made not only for immediate cash flows from the project, but also for the economic value derived from subsequent investment opportunities.
  • Such future discretionary investment opportunities are known as growth options.
  • Such growth-oriented investment may appear uneconomical when viewed in isolation but may enable firms to capture future growth opportunities.

• Limitations of Financial Statements

  • The limitations of financial statements include inaccuracies due to intentional manipulation of figures; cross-time or cross-company comparison difficulties if statements are prepared with different accounting methods; and an incomplete record of a firm's economic prospects, some argue, due to a sole focus on financial measures .
  • One limitation of financial statements is that they are open to human interpretation and error, in some cases even intentional manipulation of figures.
  • As a result, there has been renewed focus on the objectivity and independence of auditing firms.
  • Another set of limitations of financial statements arises from different ways of accounting for activities across time periods and across companies.
  • Another limit to financial statements as a window into the creditworthiness or investment attractiveness of an entity is that financial statements focus solely on financial measures of health.

• Pricing a Security

  • The price of a security is the market determination of the value of the underlying asset.
  • On the other hand, if you have to wait a year to get your dollar, you miss out on all these opportunities.
  • Those missed opportunities are called the opportunity cost.
  • Therefore, money you get in the future needs to be reduced to approximate the opportunity cost.
  • The size of the discount is based on the opportunity cost of capital and it is expressed as a percentage.

• Relationship Between Financial Policy and the Cost of Capital

  • As opposed to strictly using cost of capital, decisions must be made using opportunity cost of capital.
  • Opportunity cost of capital is the amount of money foregone by investing in one asset compared to another.
  • For example, an idle piece of land could be used for a new factory; however, the opportunity cost of what else it could have been used for must be taken into consideration during analysis.
  • Portfolio theory is a mathematical formulation of the concept of diversification in investing.
  • It attempts to maximize the expected return of a portfolio, or a collection of investments, for a given amount of risk by carefully choosing the proportions of various assets.

• Disadvantages of the Payback Method

  • Payback period analysis ignores the time value of money and the value of cash flows in future periods.
  • The payback period is considered a method of analysis with serious limitations and qualifications for its use, because it does not account for the time value of money, risk, financing, or other important considerations, such as the opportunity cost.
  • Alternative measures of "return" preferred by economists are net present value and internal rate of return.
  • First, the sum of all of the cash outflows is calculated.
  • Payback is the amount of time it takes to return an initial investment; however, it does not account for the time value of money, risk, financing, or other important considerations, such as the opportunity cost.