Ontel Engineers Proposed Developing a 10-Gigahertz Microprocessor in Early 2011

question 168

Multiple Choice

Ontel engineers proposed developing a 10-Gigahertz microprocessor in early 2011 at a cost of $20 million for a working prototype.By mid-2012,the $20 million had been spent with no prototype.The engineers request an additional $10 million to finish the project.For convenience,assume the marginal cost of producing the chip once it is developed is zero.
-In deciding whether to continue the 10-Gigahertz chip,Ontel executives should compare the __________ to the expected revenues.

• A) $20 million spent plus the extra $10 million
• B) $20 million spent
• C) extra $10 million
• D) $20 million spent minus the extra $10 million
• E) $20 million spent plus the extra $10 million plus $5 million for cost overruns

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Definitions:

Bird in the Hand Theory

A theory that suggests investors prefer the certainty of dividend payments to the possibility of much higher future capital gains.

Dividend Distribution

The method by which a corporation's earnings are distributed among its shareholders in the form of dividends.

Retaining Earnings

Profits kept by a company for reinvestment in its operations rather than distributed to shareholders as dividends.

Residual Dividend

A policy whereby dividends are based on earnings after all projects with positive NPV are funded.