Chapter 13, Section 13-2, SelfTest, Exercise 02
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If a firm fails to consider growth options, would this cause it to underestimate or overestimate projects' NPVs? Explain.

Here is a tip:

Growth or expansion means additional cash flows.


Growth or expansion options are add-ons to successful investments. They won't be made unless early success justifies them and they will, by definition, add positive NPV to the original project analysis. Therefore, not including them would make the project underestimate total potential NPV.

Verified Answer

If a company does not consider growth options, it would underestimate project NPVs.

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