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 issues should Commodore consider most seriously when making this investment decision?
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 Corporation to gather more information about the potential project, such as economic conditions, changes in industry trends, and the outcome of any ongoing research and development efforts. Commodore could use this information to reduce the project's risk by making more informed decisions about the feasibility and profitability of the investment. Additionally, waiting may give Commodore the opportunity to negotiate better prices for materials and labor, reducing the overall cost of the project. While there is a risk that competitors may enter the market in the interim, this should not be the primary concern since the project has a positive expected NPV and Commodore Corporation is unlikely to invest in a similar project. Thus, the focus should be on reducing risk and maximizing returns, which can be achieved by waiting. Choices A, B, and C do not address the issue of risk reduction and do not provide a compelling reason for why Commodore Corporation should move forward with the investment today.

Commodore Corporation Is Deciding Whether to Invest in a Project