Commodore Corporation Is Deciding Whether to Invest in a Project

question 12

Multiple Choice

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 statements best describes the issues that Commodore faces when considering this investment timing option?

• A) The investment timing option does not affect the cash flows and will therefore have no impact on the project's risk.
• B) The more uncertainty about the future cash flows, the more logical it is for Commodore to go ahead with this project today.
• C) 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.
• D) Since the project has a positive expected NPV today, this means that it should be accepted in order to lock in that NPV.
• E) Waiting would probably reduce the project's risk.

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Definitions:

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Friendly Witness

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