3. Commodore Corporation is deciding whether it makes sense to invest in a proje

Question

3. Commodore Corporation is deciding whether it makes sense to invest in a project today, or to postpone this decision for one year. Which of the following statements best describes the issues that Commodore faces when considering this investment timing option?

a. The investment timing option does not affect the expected cash flows and should therefore have no impact on the project’s risk.

b. The more uncertainty about the project’s future cash flows the more likely it is that Commodore will go ahead with the project today.

c. The waiting option can influence the cash flow and risk of the project.

d. None of the above statements is correct.

Explanation / Answer

Solution :

For any project to be invested the main thing which an individual will look the future cash flows generated from the project and the same is getting discounted at a rate to bring down the present value of the future cash flows and hence the option given above out of which the A and B options are totally incorrect because the investment timing option does affect the expected cash flow and the uncertainity about projects future cash flow will not likely for commodore to go ahead and invest and hence the answer is option C

The waiting option can influence the cash flow and risk of the project .

Thank you.

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