1. A medical group practice is considering offering a new service with risk that is greater than the current risk of the business. In evaluating this investment, the decision-maker should:

Increase the IRR of the project to reflect the greater risk.

Reject the project, because its acceptance would increase the risk of the business.

Ignore the risk differential if the project represents only a small fraction of the total assets of the firm.

Increase the cost of capital applied to the project to make it higher than the business's corporate cost of capital.

Increase the NPV of the project to reflect the greater risk.

2. Which of the following statements about project cash flow estimation is incorrect?

Strategic value should be included.

Opportunity costs should be included.

Inflation effects should be included.

Sunk costs should be included.

The effects on a business's other projects should be included.

3. In a thorough capital budgeting analysis, once a project cost of capital has been assigned that incorporates any differential project risk, the analyst should rerun the risk analysis to ensure that the new (adjusted) discount rate does not change the results. True/False

4. Sensitivity analysis measures the risk of a project by showing how much the project's NPV is affected by changes in the input variables such as volume and labor costs. Other things held constant, with changes in the input variable plotted on the horizontal axis and NPV on the vertical axis; the steeper the sensitivity line, the more sensitive the project's profitability is to the input variable. True/False

5. Large businesses with multiple divisions typically estimate divisional costs of capital along with the corporate cost of capital and project costs of capital. True/False