Although there is no empirical evidence to strongly support this hypothesis, some financial journalists have claimed that American managers are shortsighted and overly risk averse, preferring to take on relatively safe projects that pay off quickly instead of taking on longer-term projects with less certain payoffs. Assume the journalists are correct.

a. Explain why managers who use a single discount rate for valuing projects are likely to have a systematic bias against longer-term projects if the systematic risk of the cash flows of many longterm investment projects declines over time.

b. Discuss how the presence of strategic investment options affects the decisions to adopt long-term over short-term investments.

AppendixLO1