According to decision-tree analysis, investment projects should be discontinued when:
A)The probability of success is less than 50 percent
B)NPV is calculated to be negative
C)DOL increases from previous levels
D)The possibility of a failing outcome exists

Question

Quizplus · Accepted Answer

NPV is a commonly used financial metric to evaluate the profitability of an investment project. A negative NPV indicates that the project is not generating enough cash flows to cover its costs and provide a return on investment. Therefore, it is usually recommended to discontinue projects with a negative NPV to avoid further losses. The other options are not necessarily sufficient criteria to discontinue a project. For example, a project with a probability of success less than 50% may still be worth pursuing if its potential rewards outweigh its risks. Similarly, an increase in DOL may indicate higher operating leverage but may not necessarily lead to project failure. The last option is too vague and does not provide any specific criteria to make a decision.

According to Decision-Tree Analysis, Investment Projects Should Be Discontinued When