A firm is evaluating the relative riskiness of two capital budgeting projects. The following table summarizes the net present values and associated probabilities for various outcomes for the two projects. $\text { Net Present Value }$ $\begin{array}{rrr}\text { Probability }&\text { Project A }&\text { Project B }\\ \hline 0.25 & -\$ 5,000 & 0 \\ 0.50 & 4,000 & \$ 2,000 \\ 0.25 & 10,000 & 8,000 \end{array}$ -The two projects can best be characterized relative to one another by the statement,13.2)

A) project A is more risky than project B. B) since project A has a higher expected net present value, it should be chosen. C) since project B has a higher standard deviation, it is more risky and should not be chosen. D) project B is more risky than project A. A) project A is more risky than project B. B) since project A has a higher expected net present value, it should be chosen. C) since project B has a higher standard deviation, it is more risky and should not be chosen. D) project B is more risky than project A.

A corporation is assessing the risk of two capital budgeting proposals. The financial analysts have developed pessimistic, most likely, and optimistic estimates of the annual cash inflows which are given in the following table. The firm's cost of capital is 10 percent. \[\begin{array} { c c c } & { \text { Project A } } \\ \hline \text { Initial Investment } & \text { Annual cash inflow } & \text { Outcome } \\ \hline { \$ 20,000 } & \$ 5,000 & \text { Pessimistic } \\ & 10,000 & \text { Most likely } \\ & 15,000 & \text { Optimistic } \\\\ & \text { Project B } & \\ \hline \text { Initial Investment } & \text { Annual cash inflow } & \text { Outcome } \\ \hline { \text { \$100,000 } } & \$ 20,000 & \text { Pessimistic } \\ & 40,000 & \text { Most likely } \\ & 100,000 & \text { Optimistic } \end{array}\] -The range of the annual cash inflows for Project A is_________

A) $10,000 B) $0 C) $30,000 D) $5,000 A) $10,000 B) $0 C) $30,000 D) $5,000

Exam 13: Dealing With Project Risk and Other Topics in Capital Budgeting

__________measure(s) the risk of a capital budgeting project by estimating the NPVs associated with the optimistic, most likely, and pessimistic cash flow estimates.

(Multiple Choice)

4.9/5

(37)

Question 61

The danger that an unexpected change in the exchange rate between the dollar and the currency in which a project's cash flows are denominated can increase the market value of that project's cash flow.

(True/False)

4.7/5

(35)

Question 62

The beta of the risk free asset is_; the beta of the market index is _

(Multiple Choice)

4.8/5

(27)

Question 63

Forecasting the future can be done with relative certainty if a person makes the effort.

(True/False)

4.8/5

(33)

Question 64

A firm is evaluating the relative riskiness of two capital budgeting projects. The following table summarizes the net present values and associated probabilities for various outcomes for the two projects. $\text { Net Present Value }$ Probability Project A Project B 0.25 -\ 5,000 0 0.50 4,000 \ 2,000 0.25 10,000 8,000 -The two projects can best be characterized relative to one another by the statement,13.2)

(Multiple Choice)

4.8/5

(34)

Question 65

In the case of unequal-lived, mutually exclusive projects, the use of net present value to select the better project could result in an incorrect decision.

(True/False)

4.8/5

(27)

Question 66

The incremental cost of a project is known with virtual certainty since the cash flow occurs now, at time 0.

(True/False)

4.8/5

(37)

Question 67

When comparing mutually exclusive projects using the ANPV approach, you would

(Multiple Choice)

4.8/5

(35)

Question 68

A corporation is assessing the risk of two capital budgeting proposals. The financial analysts have developed pessimistic, most likely, and optimistic estimates of the annual cash inflows which are given in the following table. The firm's cost of capital is 10 percent. Project A Initial Investment Annual cash inflow Outcome \ 20,000 \ 5,000 Pessimistic 10,000 Most likely 15,000 Optimistic Project B Initial Investment Annual cash inflow Outcome \1 00,000 \ 20,000 Pessimistic 40,000 Most likely 100,000 Optimistic -The range of the annual cash inflows for Project A is_________

(Multiple Choice)

4.8/5

(37)

Question 69

A firm is considering investment in a capital project which is described below. The firm's cost of capital is 18 percent and the riskfree rate is 6 percent. The project has a risk index of 1.5. The firm uses the following equation to determine the risk adjusted discount rate, RADR, for each project: RADR = Rf + Risk Index (Cost of capital - Rf) $\text { Net Present Value }\quad\quad\quad\$1,000,000$ Probability Project A Project B 0.25 -\ 5,000 0 0.50 4,000 \ 2,000 0.25 10,000 8,000 -The net present value without adjusting the discount rate for risk is _

(Multiple Choice)

4.8/5

(27)

Question 70

The theoretical basis from which the concept of risk-adjusted discount rates is derived is

(Multiple Choice)

4.9/5

(24)

Question 71

When unequal-lived projects are independent, the length of the projects' lives is not critical.

(True/False)

4.9/5

(36)

Question 72

The amount by which the required discount rate exceeds the risk-free rate is called

(Multiple Choice)

4.8/5

(34)

Question 73

A firm is evaluating the relative riskiness of two capital budgeting projects. The following table summarizes the net present values and associated probabilities for various outcomes for the two projects. $\text { Net Present Value }$ Probability Project A Project B 0.25 -\ 5,000 0 0.50 4,000 \ 2,000 0.25 10,000 8,000 -The firm should

(Multiple Choice)

4.8/5

(38)

Question 74

In CAPM, the required return is calculated by adding the risk free rate to beta multiplied by the market risk premium.

(True/False)

4.9/5

(36)

Question 75

The higher the risk of a project, the higher its risk-adjusted discount rate and thus the lower the net present value for a given stream of cash inflows.

(True/False)

4.9/5

(34)

Question 76

__________measure(s) the risk of a capital budgeting project by estimating the NPVs associated with the optimistic, most likely, and pessimistic cash flow estimates.

The danger that an unexpected change in the exchange rate between the dollar and the currency in which a project's cash flows are denominated can increase the market value of that project's cash flow.

The beta of the risk free asset is_; the beta of the market index is _

Forecasting the future can be done with relative certainty if a person makes the effort.

In the case of unequal-lived, mutually exclusive projects, the use of net present value to select the better project could result in an incorrect decision.

The incremental cost of a project is known with virtual certainty since the cash flow occurs now, at time 0.

When comparing mutually exclusive projects using the ANPV approach, you would

The theoretical basis from which the concept of risk-adjusted discount rates is derived is

When unequal-lived projects are independent, the length of the projects' lives is not critical.

The amount by which the required discount rate exceeds the risk-free rate is called

In CAPM, the required return is calculated by adding the risk free rate to beta multiplied by the market risk premium.

The higher the risk of a project, the higher its risk-adjusted discount rate and thus the lower the net present value for a given stream of cash inflows.

Overview of Corporate Finance

Financial Statements, Cash Flows, and Taxes

Financial Statement Analysis

Financial Planning and Forecasting

Financial Markets, Institutions, and Securities

Time Value of Money

Risk and Return

Valuation of Financial Securities

The Cost of Capital

Leverage and Capital Structure

Dividend Policy

Capital Budgeting: Principles and Techniques

Working Capital and Management of Current Assets

Management of Current Liabilities

Lease Financing: Concepts and Techniques

Corporate Securities, Derivatives, and Swaps

Mergers and Acquisitions, and Business Failure

International Corporate Finance

Filters

Exam 13: Dealing With Project Risk and Other Topics in Capital Budgeting

__________measure(s) the risk of a capital budgeting project by estimating the NPVs associated with the optimistic, most likely, and pessimistic cash flow estimates.

The danger that an unexpected change in the exchange rate between the dollar and the currency in which a project's cash flows are denominated can increase the market value of that project's cash flow.

The beta of the risk free asset is___________; the beta of the market index is ___________

Forecasting the future can be done with relative certainty if a person makes the effort.

In the case of unequal-lived, mutually exclusive projects, the use of net present value to select the better project could result in an incorrect decision.

The incremental cost of a project is known with virtual certainty since the cash flow occurs now, at time 0.

When comparing mutually exclusive projects using the ANPV approach, you would

The theoretical basis from which the concept of risk-adjusted discount rates is derived is

When unequal-lived projects are independent, the length of the projects' lives is not critical.

The amount by which the required discount rate exceeds the risk-free rate is called

In CAPM, the required return is calculated by adding the risk free rate to beta multiplied by the market risk premium.

The higher the risk of a project, the higher its risk-adjusted discount rate and thus the lower the net present value for a given stream of cash inflows.

Overview of Corporate Finance

Financial Statements, Cash Flows, and Taxes

Financial Statement Analysis

Financial Planning and Forecasting

Financial Markets, Institutions, and Securities

Time Value of Money

Risk and Return

Valuation of Financial Securities

The Cost of Capital

Leverage and Capital Structure

Dividend Policy

Capital Budgeting: Principles and Techniques

Working Capital and Management of Current Assets

Management of Current Liabilities

Lease Financing: Concepts and Techniques

Corporate Securities, Derivatives, and Swaps

Mergers and Acquisitions, and Business Failure

International Corporate Finance

Filters

The beta of the risk free asset is_; the beta of the market index is _