Explain under what circumstances stockholders may prefer low NPV projects to high NPV projects? If stockholder choose to do so, will they get away with it without any adverse consequences to the value of the firm?

2. Typical capital budgeting approaches does not account for the potential value of future expansion opportunities which may become available later in the life of the project.

a) Provide an example of an expansion opportunity and discuss how it can be evaluated using the option pricing model.

b) What are the parameters of the expansion option (underlying asset, exercise price, variance, risk-free rate, maturity)?