Consider a New Firm That Is Working on the First

question 78

Multiple Choice

Consider a new firm that is working on the first generation of long-awaited consumer jet packs. The project will take a tremendous amount of R&D expenditure. Even if the development is successful, manufacturing the first generation of jet packs is likely to be so expensive that only a select few consumers will be able to afford them. The projected sales of the first generation of jet packs almost certainly won't cover the development and manufacturing costs-the project has a negative NPV. Which of these reasons would validate the firm's decision to pursue the jet pack project?

• A) If development is unsuccessful, it can abandon the project before spending money on manufacturing.
• B) If the project is successful, it may lead to a very profitable second project-a cheaper jet pack that will be a positive-NPV project.
• C) Because it is a high-tech firm, the cash flows generated by a project are not important to valuing the company.
• D) None of these reasons support the decision to pursue the project.

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Definitions:

Approximately Normally Distributed

Refers to a data set or population that closely follows a normal distribution, characterized by a bell-shaped curve.

Z-score

A statistical measure that describes a value's relationship to the mean of a group of values, measured in terms of standard deviations from the mean.

Finite Population Correction

An adjustment made to the standard formula for calculating sample size and variance when the sample size is a significant fraction of the total population.

Non-normal Probability Distribution

Describes a distribution of data that does not follow the normal distribution pattern, showing skewness or kurtosis different from a bell-shaped curve.