Exam 11: Capital Budgeting and Risk

Total project risk is

Rolling in Dough Cookie Corporation is trying to determine its certainty equivalent NPV. What is the CNPV if the risk free ratel is 2% and the initial investment is $19,000 (rounded)?

The net present value of a project is normally distributed with an expected value of $52,000 and a standard deviation of $31,515. Determine the probability that the project will have a net present value of less than zero.

Quick Flick is considering two investments. Both require a net investment of $120,000 and have the following net cash flows: Quick uses a combination of the net present value approach and the payback approach to evaluate investment alternatives. The firm uses a discount rate of 14 percent and requires that all projects have a payback period no longer than 3 years. Which investment or investments should Quick accept?

A simulation analysis for a new acquisition has indicated that the expected NPV is $50 million with a standard deviation of $40 million. Assume that NPV is normally distributed. What is the probability that the project will be unacceptable?

The certainty equivalent factors used to adjust the cash flows for risk can range from

Haulin'It Towing Company is considering adding more tow trucks to its fleet. The cost of the new trucks is $150,000. The project will utilize the risk adjusted discount, the firm has a beta of 1.3, the risk free rate is 7% and the return in the market is 15%. Should Haulin' It add the additional trucks if the expected increased revenues will be as follows?

DKA uses the certainty equivalent approach to deal with total project risk and is considering a project with the following: What is the certainty equivalent NPV for this project if the risk-free rate is 8% and the required return on the market portfolio is 15%?

What item has made sensitivity analysis simple and inexpensive?

The Chris-Kraft Co. is financed entirely with equity and the firm has a beta of 1.25. The current risk-free rate is 7 percent and the expected market return is 15 percent. Chris-Kraft is considering an investment project with a risk that matches the firm's average risk, requires a net investment of $70,000, and has net cash flows of $18,000 per year for 8 years. Should Chris-Kraft invest in the project?

With the risk adjusted discount rate approach, in the context of total risk, the discount rates used in evaluating cash flows are determined ____.

Which of the following is/are a risk associated with projects that must be considered when determining the net present value? I. Financial risk II. Pure project risk

M-tel is financed entirely with equity and the firm's stock has a beta of 0.85. M-tel is considering investing in a project that is expected to have a beta of 1.3. The project requires an initial outlay of $6 million and is expected to generate after-tax net cash flows of $1.3 million each year for 8 years. Calculate the NPV of the project. Assume the risk-free rate is 7% and the expected market return is 14%. (Note: Problem requires either calculator use or interpolation from the tables. The suggested solutions use calculator accuracy.)

The type of analysis that models some event and requires that estimates be made of the probability distribution of each cash flow element is:

A major problem with using the risk-adjusted discount rate approach is the determination of

The net present value/payback approach is a useful approach when

____ are needed for sensitivity analysis and have made the application simple and inexpensive.

Determine the coefficient of variation for the following annual cash in flows from an investment project:

SCAN is a multi-divisional utility company. SCAN has four divisions with the following betas and proportions of the firm's total assets: What is the firm's weighted average beta?

A weakness of the net present value/payback method is: