Gizmo Motors is very likely to enter financial distress. Without a dramatic change of events over the next couple of years, the company will be unable to pay its lenders, who will then gain control of the company's assets. A group of shareholders has pressured the company's management to begin manufacturing and selling one of the company's concept cars in the hope that it will be a big hit. Concept cars are prototypes that are developed to test new ideas and to show off at auto shows. Although elements of concept cars are often incorporated into product lines, rushing a concept car into production is very risky. The best estimates about the concept car make it appear to be a negative-NPV project. This is a good example of:

Question

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The scenario describes the asset substitution problem, where shareholders push for riskier projects (like the concept car) in hopes of high returns, potentially at the expense of creditors, especially when the company is near financial distress.

Gizmo Motors Is Very Likely to Enter Financial Distress