The following actions by the managers may result in over-investment problem:
I. entrenching investments
II. empire building
III. investing beyond the point where NPV falls zero
A) I only
B) II only
C) I and II only
D) I, II, and III

Question

Quizplus · Accepted Answer

All three actions listed contribute to over-investment problem. Entrenching investments refers to the tendency of managers to maintain or increase investment in a project even if it is no longer profitable or necessary. Empire building refers to managers expanding their divisions or departments for their own benefit, rather than for the benefit of the company. Investing beyond the point where NPV falls zero means that additional investments will not generate any additional cash flows, which leads to a decline in the company's overall profit. All of these actions can result in over-investment, which can lead to a reduction in the company's overall profitability.

The Following Actions by the Managers May Result in Over-Investment