Consider a new firm that is working on the first generation of long-awaited consumer jet packs. The project will take a tremendous amount of R&D expenditure. Even if the development is successful, manufacturing the first generation of jet packs is likely to be so expensive that only a select few consumers will be able to afford them. The projected sales of the first generation of jet packs almost certainly won't cover the development and manufacturing costs-the project has a negative NPV. Which of these reasons would validate the firm's decision to pursue the jet pack project?

Question

Quizplus · Accepted Answer

Although the first generation jet pack project has a negative NPV, the potential success and profitability of a cheaper second project would justify the R&D expenditure and potential losses incurred by the first project. This would make the decision to pursue the jet pack project more valid as it has the potential to lead to a positive NPV project in the future. Option A is not a strong enough reason to support the decision to pursue the project as it only addresses failure, not success. Option C is incorrect as cash flows are important in valuing any company, regardless of its high-tech nature. Option D is incorrect as option B does support the decision to pursue the project.

Consider a New Firm That Is Working on the First