Permanently rejecting an investment today might not be a good choice because
I.the size of the firm will decline;
II.there are always errors in the estimation of NPVs;
III.the project's real option value is negative;
IV.the company is forgoing the option to make the investment in the future if economic and industry conditions change for the better
A)I only
B)II only
C)I, II, and III only
D)IV only

Question

Quizplus · Accepted Answer

Rejecting an investment permanently means the company is giving up the option to make the investment in the future if economic and industry conditions change for the better. Therefore, permanently rejecting an investment might not be a good choice because the company is forgoing the opportunity to create value in the future. The size of the firm might decline if it fails to invest in projects that could have allowed it to expand or stay competitive. Additionally, there are always errors in the estimation of NPVs, so the decision to reject a project permanently based purely on the estimated NPV may not be reliable. Finally, the project's real option value could be negative today, but it might become positive in the future due to changes in economic and industry conditions, giving the company an opportunity to create value that it had previously rejected. Therefore, rejecting an investment permanently might not be a wise choice in some cases.

Permanently Rejecting an Investment Today Might Not Be a Good