Asked by Reegan Van Rooyen on Jun 10, 2024
Verified
The NPV computed using static DCF analysis is _________ if the project gives us the opportunity to invest additional funds if things go well; that is, it includes an option to expand.
A) Understated.
B) Overstated.
C) Accurately stated even.
D) Not conservative enough.
E) Useless.
NPV
Net Present Value; a calculation that compares the value of money now to the value of that money in the future, taking inflation and returns into account.
Static DCF Analysis
A method of valuing a project, company, or asset using the concepts of the time value of money where all cash flows are assumed to occur at fixed points in time.
Option to Expand
The option to expand is a strategic flexibility available to companies, allowing them to increase their investment in a project based on future market conditions or performance indicators.
- Employ sensitivity analysis to examine the impact of variable alterations on the Net Present Value of a project.
- Accurately apply discounted cash flow (DCF) analysis, comprehending the effects of choices like the option to abandon or expand a project.
Verified Answer
JH
Jacob HusikJun 16, 2024
Final Answer :
A
Explanation :
The NPV computed using static DCF analysis is understated if the project includes an option to expand. This is because static DCF does not account for the additional value that flexibility or options (such as the option to expand) can bring to a project.
Learning Objectives
- Employ sensitivity analysis to examine the impact of variable alterations on the Net Present Value of a project.
- Accurately apply discounted cash flow (DCF) analysis, comprehending the effects of choices like the option to abandon or expand a project.