Exam 11: Capital Budgeting and Risk

With the ____ approach, the decision maker adjusts separately each period's cash flows to account for the specific risk of those cash flows.

What are the primary advantages and disadvantages of applying simulation to capital budgeting risk analysis?

The risk-adjusted discount rate approach is preferable to the weighted cost of capital approach when

Billy Bob is considering building a water slide park that will require a net investment of $200,000 and yield the following net cash flows: If the risk-free rate is 8 percent and the market risk premium is 6 percent, what is the certainty equivalent NPV for this project?

How can beta, a measure of systematic risk of a portfolio of securities, be used to judge the risk of a firm?

All of the following are advantages of the NPV-payback approach to risk analysis except

Determine the pure project beta of a project that has 30% debt and 70% equity. The beta for the company is 1.4 and a tax rate of 40%.

When evaluating a capital expenditure to be made in a foreign country, the parent firm must be concerned with the

American Biodyne (AB) is considering expanding into a new line of business. The expansion will require an investment of $500,000 in new equipment. This equipment which will cost another $300,000 to install, will be depreciated on a straight-line basis over an 8-year period to an estimated salvage value of zero. If the expansion project is accepted, working capital will increase by $100,000 immediately. Revenues for the first 3 years are forecasted at $650,000 per year and at $800,000 in years 4-8. Operating costs exclusive of depreciation are expected to be $310,000 per year for 3 years and increase to $400,000 per year for the following 5 years. AB has a marginal tax rate of 40% and its required rate of return for the project under consideration is 16%. If AB assumes that the new equipment will have an actual market value of $50,000 at the end of the 8th year, should the expansion be undertaken?

The basic capital budgeting decision models, that is, NPV and IRR, handle risk by

In a simulation analysis, a model is simulated on a computer program and run through several iterations. The results of these iterations are used to

A firm's leveraged beta will always be ____ its unleveraged beta.

What are the weaknesses of the net present value/payback approach?

Given the following cash flows and certainty equivalent factors for an investment project, determine the certainty equivalent net present value. The firm's cost of capital is 14% and the risk-free rate is 6%.

The risk assessment technique that considers the impact of simultaneous changes in key variables on the desirability of an investment project is ____.

Calco is a multi-divisional firm with a weighted cost of capital of 14 percent and a risk-adjusted discount rate for its can division of 17 percent. A planned expansion in the can division requires a net investment of $170,000 and results in expected cash inflows of $42,000 a year for seven years. Should Calco invest in this expansion?

The risk of an investment project is defined in terms of the potential ____ of its returns.

All of the following are correct statements about a project's total risk EXCEPT:

Many firms combine net present value and payback when analyzing project risk. Which of the following statements is/are correct? I. Both payback and net present value consider the frequency of cash flows. II. Both payback and net present can be adjusted for risk.

Which of the following techniques can be used to analyze total project risk?