Westover Farms has developed a new strain of feed corn which is expected to produce more ears per acre. The company is now analyzing the value of actually planting and harvesting their first crops of this strain. The net present value (NPV) of the project is $740,000. This value was computed assuming that the project will last through five growing seasons. If Westover would include an option to abandon in the NPV computation, the NPV would:
A) Not be affected.
B) Would decrease over the life of the project.
C) Would decrease, but only for the first year of the project.
D) Increase, at least in the early years of the project.
E) Increase, but only if the project continues for the entire five years.

Question

Quizplus · Accepted Answer

Including an option to abandon generally increases the NPV because it adds flexibility to the project, allowing the company to exit if the project turns out to be less profitable than expected, especially valuable in the early years when uncertainty is higher.

Westover Farms Has Developed a New Strain of Feed Corn