Lighthouse Corporation Uses the NPV Method for Selecting Projects, and It

question 18

Multiple Choice

Lighthouse Corporation uses the NPV method for selecting projects, and it does a reasonably good job of estimating projects' sales and costs. However, it never considers real options that might be associated with projects. Which of the following statements is most likely to describe its situation?

• A) Its estimated capital budget is probably too small, because projects' NPVs are often larger when real options are taken into account.
• B) Its estimated capital budget is probably too large due to its failure to consider abandonment and growth options.
• C) Failing to consider abandonment and flexibility options probably makes the optimal capital budget too large, but failing to consider growth and timing options probably makes the optimal capital budget too small, so it is unclear what impact not considering real options has on the overall capital budget.
• D) Failing to consider abandonment and flexibility options probably makes the optimal capital budget too small, but failing to consider growth and timing options probably makes the optimal capital budget too large, so it is unclear what impact not considering real options has on the overall capital budget.
• E) Real options should not have any effect on the size of the optimal capital budget.

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Definitions:

Immediate Predecessors

Tasks or activities that must be completed directly before a certain task can begin, critical for understanding dependencies in project management and scheduling.

Activity Duration

The total time taken to complete a specific activity, task, or process from start to finish.

CPM Network

A project management tool that models tasks, timelines, and dependencies within a project as a network, standing for Critical Path Method.

Immediate Predecessor

In project management, refers to an activity that must be completed directly before another specific activity can commence.