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:

Export-import Sector

The export-import sector consists of the trade activities in which goods and services are sold to a foreign country (export) and bought from a foreign country (import), contributing significantly to a nation's economy.

Joseph Stiglitz

An American economist and a professor at Columbia University, known for his work on the theory of markets with asymmetric information and his critical view on global economic policies.

IMF

The International Monetary Fund, an international organization that aims to foster global monetary cooperation and financial stability, facilitate international trade, and reduce poverty.

Expansionary Economic Policies

Government measures, like increasing spending or cutting taxes, designed to stimulate economic growth.