Which of the Following Reasons Is NOT a Valid Explanation

question 74

Multiple Choice

Which of the following reasons is NOT a valid explanation of why managers sometimes choose to take on negative-NPV Projects?

• A) The NPV analysis does not include a valuable real option to expand the project if things go well.
• B) If the company has debt, managers may create value for shareholders by taking on some risky negative-NPV projects.
• C) Managers' pay-off functions represent the pay-offs of lenders. By taking negative-NPV projects, the managers can create value for lenders.
• D) All of the above descriptions are valid explanations for why managers sometimes take on negative NPV projects.

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Definitions:

Fair Value

An estimate of the market value of an asset or liability based on current market prices or valuations of similar transactions.

Long-Term Construction Projects

Large scale construction endeavors that span over a long period, often requiring special accounting methods like the percentage-of-completion method for revenue recognition.

Percentage-Of-Completion Method

An accounting method used to recognize revenue and expenses of long-term contracts as a proportion of the work completed during the period.

Revenue Recognition

The accounting principle that outlines the specific conditions under which revenue is recognized as earned and can be reported on financial statements.