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:

Carl Rogers

An influential psychologist who developed client-centered therapy, emphasizing unconditional positive regard, empathy, and the importance of the client in the healing process.

Ego

In psychoanalytic theory, the part of the personality that mediates between the demands of the id, superego, and reality.

Id

In psychoanalytic theory, the part of the mind in which innate instinctive impulses and primary processes are manifest.

Superego

The third psychic structure, which functions as a moral guardian and sets forth high standards for behavior.