Question

According to real option theory, it is not always correct to accept a positive NPV project...

According to real option theory, it is not always correct to accept a positive NPV project immediately.

A. TRUE

B. FALSE

Justify your choice here in 30 words

Homework Answers

Answer #1

According to NPV theory,

NPV = PV of Cash Inflows - PV of Cash Outflows
If NPV > 0 , Project can be accepted
NPV = 0 , Indifference point. Project can be accepted/ Rejected.
NPV < 0 , Project will be rejected.

Where NPV theory is dificient and where Real Options theory fills the gap is where subsequent decisions can modify the project once it is undertaken. NPV makes no provision for this flexibility of the project and consequently undervalues its benefits

Hence the stetment is correct.

Pls do rate, if the answer is correct and comment, if any further assistance is required.

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