A financial manager who does not follow the general constraints of the NPV rule may:
A)accept a negative project for fear of losing an investment opportunity.
B)accept a marginally acceptable NPV project limiting the corporation's ability to choose a competing project.
C)option the project to another firm.
D)not take a positive NPV project even if the NPV is adequate reward to forego the option.
E)None of the above.

Question

Quizplus · Accepted Answer

Following the general constraints of the NPV rule ensures that a project will maximize shareholders' wealth. However, a financial manager who does not follow these constraints may accept a marginally acceptable NPV project, limiting the corporation's ability to choose more profitable projects in the future. This is known as the "mutually exclusive investment problem." Accepting a negative project or not taking a positive NPV project would go against the goal of maximizing shareholder wealth, and optioning the project to another firm may not be a financially beneficial decision. Therefore, the best choice is B.

A Financial Manager Who Does Not Follow the General Constraints