Ashgate Enterprises Uses the NPV Method for Selecting Projects, and It

question 1

Multiple Choice

Ashgate Enterprises 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 large due to its failure to consider abandonment and growth options.
• B) 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.
• C) 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.
• D) Real options should not have any effect on the size of the optimal capital budget.
• E) Its estimated capital budget is probably too small, because projects' NPVs are often larger when real options are taken into account.

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Definitions:

Cash Disbursements

Payments made in cash by a business, including operating expenses, purchasing of assets, and other financial activities.

Manufacturing Overhead

All manufacturing costs that are not directly related to the production of a product, including expenses such as rent, utilities, and salaries for managers.

Direct Labor Cost

The cost that can be directly attributed to the production of specific goods or services, such as wages of employees directly involved in production.

Predetermined Manufacturing Overhead

An estimated rate used to assign manufacturing overhead costs to cost objects during a specific period, calculated before the period begins.