Whether to invest in a project today or to postpone the decision until next year is a decision facing the CEO of the Aaron Co. 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 Aaron decides to wait. Which of the following statements best describes the issues that Aaron faces when considering this investment timing option?
A) the more uncertainty about the future cash flows, the more logical it is for aaron 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.
E) the investment timing option does not affect the cash flows and will therefore have no impact on the project's risk.

Question

Quizplus · Accepted Answer

By having the ability to wait and see you reduce the risk of the project. Therefore, statement e is false. The greater the uncertainty, the more value there is in waiting for additional information before going on with a project. Therefore, statement a is false. Statements b and c are not necessarily true. By waiting to do a project you may lose strategic advantages associated with being the first competitor to enter a new line of business, which may alter the cash flows. Since statements a, b, c, and e are false, the correct choice is statement d.

Whether to Invest in a Project Today or to Postpone