Suppose a project involving the introduction of a new product is marginally profitable based on a 6-year cash flow estimate, but becomes much more profitable if two additional years are included in the analysis. How much weight would you assign to the two additional years of cash flows?
A)The two additional years of cash flows should not be considered.
B)The two additional years of cash flows should be treated just like the first six years.
C)The two additional years of cash flows should be treated just like the first six years if management is confident that the product will be viable for eight years.
D)Because the distant future is increasingly uncertain analytical extensions that make a marginal project look good should be considered with substantial skepticism.
E)Both c. and d. may be correct depending on the situation.

Question

Quizplus · Accepted Answer

The correct choices are C and D because the decision to include the two additional years of cash flows depends on management's confidence in the product's viability for eight years (C), and the inherent uncertainty of long-term projections should be approached with skepticism (D). These considerations vary by situation, making both responses potentially correct.

Suppose a Project Involving the Introduction of a New Product