Whether to Invest in a Project Today or to Postpone

question 3

Multiple Choice

Whether to invest in a project today or to postpone the decision until next year is a decision facing the CEO of the Aaron Co.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 Aaron decides to wait.Which of the following statements best describes the issues that Aaron faces when considering this investment timing option?

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

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Definitions:

Factorial Experiment

An experimental design that allows simultaneous conclusions about two or more factors.

Treatment Combinations

In experimental design, the different sets of conditions applied to experimental units, used to determine the effect of multiple factors on an outcome.

Factor A

A term used in experimental design to represent an independent variable that is manipulated to observe its effect on a dependent variable.

Analysis of Variance

A collection of statistical models and their associated procedures used to analyze the differences among group means.