Richmond Graphics Is a Small Company Contemplating a Project with a $5M

question 80

Multiple Choice

Richmond Graphics is a small company contemplating a project with a $5M initial investment. A traditional capital budgeting analysis shows the project to have an NPV of $3.3M. However, a simple decision tree analysis reveals that the project has a 90% probability of an NPV of $4.0M and a 10 % chance of a ($3.0M) loss NPV. Management should probably:

• A)accept the project because its traditional NPV is positive.
• B)accept the project even though there is some risk because the overwhelming likelihood is that the outcome will be favorable.
• C)reject the project because it has some risk.
• D)reject the project because it entails a fairly good chance of a loss that could ruin a small company coupled with a likely gain that isn't very large.