Question: Deficit Corp. management has determined that they will come up short by $50 million on the firms debt obligations at the end of this year.

Deficit Corp. management has determined that they will come up short by $50 million on the firm’s debt obligations at the end of this year. Management has identified a positive NPV project that will require a great deal of effort on their part. However, this project is expected to generate only $40 million at the end of the year. Assume that all the members of Deficit’s management team will lose their jobs if the firm goes into bankruptcy at the end of the year. How likely is management to take the positive NPV project? If management declines the project, what kind of cost will Deficit’s stockholders incur?

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