Richmond Graphics Is a Small Company Contemplating a Project with a $5M

Multiple Choice

Richmond Graphics is a small company contemplating a project with a $5M initial investment. A traditional capital budgeting analysis shows the project to have an NPV of $3.3M. However, a simple decision tree analysis reveals that the project has a 90% probability of an NPV of $4.0M and a 10 % chance of a ($3.0M) loss NPV. Management should probably:

A) accept the project because its traditional NPV is positive.
B) accept the project even though there is some risk because the overwhelming likelihood is that the outcome will be favorable.
C) reject the project because it has some risk.
D) reject the project because it entails a fairly good chance of a loss that could ruin a small company coupled with a likely gain that isn't very large.