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WSP Inc. is involved in a wide range of unrelated projects. The company will pursue any project that it thinks will create value for its stockholders. Consequently, the risk level of the company's projects tends to vary a great deal from project to project. If WSP Inc. does not risk-adjust its discount rate for specific projects properly, which of the following is likely to occur over time? Check all that apply. The firm will reject too many relatively safe projects. The firm will become less risky. The firm will make poor capital budgeting decisions that could jeopardize the long-run viability of the company. to When a project involves an entirely new product line, the firm may be able to obtain betas from calculate a weighted average cost of capital (WACC) for its new product line. pure-play companies in the new area Consider the case of another company. Davis Printing is evaluating two mutually exclusive projec the firm's previous projects ment today and have expected NPVs of $200,000. Management conducted a full risk analysis of these two projects, and thic TEUILS OIC STO VITUCIOW. Risk Measure Project A $80,000 Standard deviation of project's expected NPVS Project beta Project B $120,000 1.0 1.2 Correlation coefficient of project cash flows (relative to the firm's existing projects) 0.7 0.5 Which of the following statements about these projects' risk is correct? Check all that apply. Project B has more stand-alone risk than Project A. Project A has more market risk than Project B. Project B has more market risk than Project A. Project B has more corporate risk than Project A. Wizard Inc. has to choose between two mutually exclusive projects. If it chooses project A, Wizard Inc. will have the opportunity to make a similar investment in three years. However, if it chooses project B, it will not have the opportunity to make a second investment. The following table lists the cash flows for these projects. If the firm uses the replacement chain (common life) approach, what will be the difference between the net present value (NPV) of project A and project B, assuming that both projects have a weighted average cost of capital of 10%? Cash Flow Project A Year 0: -$17,500 Year 0: -$45,000 Year 1: 10,000 Year 1: 10,000 Year 2: 16,000 Year 2: 17,000 Year 3: 15,000 Year 3: 16,000 Year 4: 15,000 Year 5: 14,000 Year 6: 13,000 $9,384 $7,625 O $11,730 $8,211 $9,971 Wizard Inc. is considering a four-year project that has a weighted average cost of capital of 13% and a NPV of $89,567. Wizard Inc. can replicate this project indefinitely. What is the equivalent annual annuity (EAA) for this project? $30,112 $27,101 $34,629 $33,123 $28,606