Positive NPV
Financial managers may rationalize that it is in their immediate interest to invest in short-term projects because they bring the most shareholder benefits; this is, in other words, the so-called agency problem. However, what could be the long-term consequences of that strategy? Watch the short agency problem video (7:14) below for an explanation of this conundrum in detail with good examples.
1) Identify and describe a long-term investment project (either real or fictional) that would likely require significant capital commitment.
2) If you were acting as a financial analyst, what factors would you consider in the decision to move forward or abandon the project?In your initial response, you may discuss such factors as:
- NPV
- IRR
- EBIT
- WACC
- Corporate structure
- Market structure
- Corporate goals and mission
3) Regardless of these factors, why might this project still be a worthy investment?
4) Are there certain industries that might demand a more long-term strategy? Which ones?