Commodore Corporation is deciding whether to invest in a project today or to postpone the decision until next year. The project has a positive expected NPV, but its cash flows could be less than expected, in which case the NPV could be negative. No competitors are likely to invest in a similar project if Commodore decides to wait. Which of the following statements best describes the issues that
Commodore faces when considering this investment timing option?
A) The more uncertainty about the future cash flows, the more logical it is for Commodore to go ahead with this project today.
B) Since the project has a positive expected NPV today, this means that its expected NPV will be even higher if it chooses to wait a year.
C) Since the project has a positive expected NPV today, this means that it should be accepted in order to lock in that NPV.
D) Waiting would probably reduce the project's risk.

Question

Quizplus · Accepted Answer

Waiting would allow Commodore to gather more information about the project's cash flows, potentially reducing uncertainty and risk.

Commodore Corporation Is Deciding Whether to Invest in a Project