Question 1

Which of the following is NOT a typical real option in capital budgeting?

Accepted Answer

A) The option to expand the project 
B) The option to abandon the project 
C) The option to reduce the scale of a project 
D) The option to discount the project at a lower rate of return

Question 2

The pure play method attempts to identify publicly traded firms that are engaged solely in the same business as the project or division.

Accepted Answer

A) True 
 B)False

Question 3

What are the consequences of excessive optimism or pessimism in forecasting expected project cash flows?

Accepted Answer

The answer of What are the consequences of excessive optimism...

Question 4

Buttercrumbs Bakery expects to sell 1 million scones next year for $1.25 each.The variable cost of a scone is $0.75.Fixed costs are $150,000, depreciation $200,000 and the tax rate is 25%.If the bakery can increase the price of a scone to $1.50 and all other variables remain the same, free cash flow will increase by [blank].

Accepted Answer

A) $37,500 
B) $150,000 
C) $187,500 
D) $250,000

Question 5

Which of the following is considered the major risk when analyzing projects in a multinational environment?

Accepted Answer

A) Currency fluctuations 
B) Inflation 
C) Political risk 
D) Lack of available betas

Question 6

Real options can have the effect of

Accepted Answer

A) increasing a project's NPV. 
B) reducing a project's risk. 
C) gaining information about future opportunities. 
D) All of the above.

Question 7

There is a 30% probability that an office building will be sold after five years for $30 million, a 50% probability that it will be sold for $20 million and a 20% probability that it will be sold for $10 million.What is the expected value of the office building in five years?

Accepted Answer

A) $20 million 
B) $21 million 
C) $30 million 
D) $10 million

Question 8

Briefly describe the five steps in performing a simulation analysis.

Accepted Answer

The answer of Briefly describe the five steps in performing...

Question 9

Risk-adjusted discount rate is based on the notion that investors require higher rates of return on more risky projects.

Accepted Answer

A) True 
 B)False

Question 10

The end result of a simulation analysis is

Accepted Answer

A) a probability distribution of project cash flows. 
B) a clear decision on whether or not a project should be accepted. 
C) a probability distribution of possible NPVs. 
D) a list of value drivers and their probabilities.

Question 11

What is the expected NPV of the project if the option to abandon is considered?

Accepted Answer

A) $4545 
B) $31,694 
C) $37,267 
D) $63,388

Question 12

Australian Fireplaces expects to sell 1200 gas fireplaces in 2019 at an average price of $2400 each.It believes that unit sales will grow between −5% and +5% per year and prices will rise or fall by as much as 5% per year.Forecast sales revenue for 2021 if the number of units sold increases by 5% per year and prices remain flat.

Accepted Answer

A) $2,880,000 
B) $3,168,000 
C) $3,333,960 
D) $3,175,200

Question 13

Future Pharmaceuticals believes that changes in health insurance may increase demand by as much as 10%, but also lower prices by as much as 10%.It is also concerned that the cost of materials may increase as much as 10% and the company may or may not be able to pass these higher costs on to its customers.To estimate expected, best case and worst case results, Future should use [blank].

Accepted Answer

A) sensitivity analysis 
B) scenario analysis 
C) political risk analysis 
D) probability analysis

Question 14

Approximately what percentage of new businesses survive their first year?

Accepted Answer

A) 20 
B) 40 
C) 60 
D) 80

Question 15

[blank] is a risk analysis technique in which the best- and worst-case net present values are compared with the project's expected net present value.

Accepted Answer

A) Project standing alone risk 
B) Decision tree analysis 
C) Scenario analysis 
D) Pure play method

Question 16

When using simulation to analyze a large capital project, the decision rule is:

Accepted Answer

A) There is no clear cut decision rule, but the probabilities will produce a more informed decision 
B) Accept the project if the probability of a positive NPV is greater than 50% 
C) Reject the project if the probability of a negative NPV is greater than 5% 
D) Reject the project if the probability of a negative NPV is greater than 16%

Question 17

Using simulation provides the financial manager with a point estimate of an investment's net present value or internal rate of return.

Accepted Answer

A) True 
 B)False

Question 18

What is the expected NPV of the project if the option to expand is considered?

Accepted Answer

A) $355,542 
B) $671,545 
C) $236,924 
D) $711,084

Question 19

What is the expected net operating profit after tax (NOPAT)if the most likely estimates are used?

Accepted Answer

A) $493,500 
B) $330,000 
C) $300,000 
D) $124,500

Question 20

According to the capital asset pricing model, scenario risk is the only relevant risk for capital-budgeting purposes.

Accepted Answer

A) True 
 B)False

Exam 13: Risk Analysis and Project Evaluations

Which of the following is NOT a typical real option in capital budgeting?

The pure play method attempts to identify publicly traded firms that are engaged solely in the same business as the project or division.

What are the consequences of excessive optimism or pessimism in forecasting expected project cash flows?

Which of the following is considered the major risk when analyzing projects in a multinational environment?

Real options can have the effect of

There is a 30% probability that an office building will be sold after five years for $30 million, a 50% probability that it will be sold for $20 million and a 20% probability that it will be sold for $10 million.What is the expected value of the office building in five years?

Briefly describe the five steps in performing a simulation analysis.

Risk-adjusted discount rate is based on the notion that investors require higher rates of return on more risky projects.

The end result of a simulation analysis is

What is the expected NPV of the project if the option to abandon is considered?

Approximately what percentage of new businesses survive their first year?

[blank] is a risk analysis technique in which the best- and worst-case net present values are compared with the project's expected net present value.

When using simulation to analyze a large capital project, the decision rule is:

Using simulation provides the financial manager with a point estimate of an investment's net present value or internal rate of return.

What is the expected NPV of the project if the option to expand is considered?

What is the expected net operating profit after tax (NOPAT) if the most likely estimates are used?

According to the capital asset pricing model, scenario risk is the only relevant risk for capital-budgeting purposes.