Which one of the following statements is correct?
A) Having the ability to temporarily cease operations is referred to as the option to abandon.
B) Strategic options are relatively easy to evaluate using discounted cash flow analysis.
C) Ignoring the option to expand causes the net present value of a project to be overestimated.
D) The option to abandon a project has no real financial value.
E) Ignoring the option to abandon causes the net present value of a project to be underestimated.

Question

Quizplus · Accepted Answer

Ignoring the option to abandon typically leads to underestimating the net present value (NPV) of a project because it fails to account for the potential savings or value recovery from ceasing a non-profitable project. This option can provide a form of insurance or a way to limit losses, thereby potentially increasing the project's overall value.

Which One of the Following Statements Is Correct