Exam 12: Risk and Refinements in Capital Budgeting

Table 12.6 Yong Importers, an Asian import company, is evaluating two mutually exclusive projects, A and B. The relevant cash flows for each project are given in the table below. The cost of capital for use in evaluating each of these equally risky projects is 10 percent. -The NPVs of Projects A and B are ________. (See Table 12.6)

All projects should always use the WACC as the required return for capital budgeting purposes.

Exchange rate risk is easier to protect as compared to political risk.

A firm is evaluating two mutually exclusive projects that have unequal lives. The firm must evaluate the projects using the annualized net present value approach and recommend which project they should select. The firm's cost of capital has been determined to be 14 percent, and the projects have the following initial investments and cash flows:

Table 12.3 Tangshan Mining Company is considering investment in one of two mutually exclusive projects M and N which are described below. Tangshan Mining's overall cost of capital is 15 percent, the market return is 15 percent and the risk-free rate is 5 percent. Tangshan estimates that the beta for project M is 1.20 and the beta for project N is 1.40. -Using the risk-adjusted discount rate method of project evaluation, the NPV for Project N is ________. (See Table 12.3)

An IRR approach to capital rationing involves graphically plotting project IRRs in descending order against total dollar investment on an ________ graph.