Sheehan Inc. is deciding whether to invest in a project today or to postpone the

Question

Sheehan Inc. is deciding whether to invest in a project today or to postpone the decision until next year. The project has a positive expected NPV, but its cash flows might turn out to be lower than expected, in which case the NPV could be negative. No competitors are likely to invest in a similar project if the firm decides to wait. Which of the following statements best describes the issues that the firm faces when considering this investment timing option?

A. The investment timing option would not affect the cash flows and therefore would have no impact on the project's risk. B. The more uncertainty about the future cash flows, the more logical it is to go ahead with this project today. C. Since the project has a positive expected NPV today, this means that its expected NPV will be even higher if the firm chooses to wait a year. D. Since the project has a positive expected NPV today, this means that it should be accepted in order to lock in that NPV. E. Waiting would probably reduce the project's risk.

Explanation / Answer

Hi,

Option E is the correct answer.

Thanks.

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