Why might companies disregard a positive NPV? MIT professor of financial economics Stewart C. Myers asserts that different decision rules might apply when investments are long-term rather than short-term (Myers, 1977).
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.
Identify and describe a long-term investment project (either real or fictional) that would likely require significant capital commitment.
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
Regardless of these factors, why might this project still be a worthy investment? Are there certain industries that might demand a more long-term strategy? Which ones? In your responses to your peers, compare and contrast your views with your classmates’ observations.
