16. Which of the following statements is CORRECT? aSensitivity analysis is a good way to measure market risk because it explicitly takes into account b. One advantage of sensitivity analysis relative to scenario analysis is that it explicitly takes into account the probability of specific effects occurring, whereas scenario analysis canmot account for probablities c. Well-diversified stockholders do not need to consider market risk when determining required rates of diversification effects d. Market risk is important, but it does not have a direct effect on stock prices because it only affects bet where input variables are selected e. Simulation analysis is a computerized version of scenario analysis randomly on the basis of their probability distributions. 17. Other things held constant, which of the following would increase the NPV of a project being a. A shift from straight-line to MACRS depreciation. b. Making the initial investment in the first year rather than spreading it over the first three years. C An increase in the discount rate associated with the project. d. An increase in required net operating working capital e. The project would decrease sales of another product line. 18. Large Company Inc. is considering to create a new product. In evaluating whether to go abead with the project, of the following items should NOT be explicitly considered when cash flows are estimated? company will produce the new product in a vacant building that was used to produce another product until last year. The building could be sold, leased to another company, or used in the future to produce another of the firm's products b. The project will utilize some equipment the company currently owns but is not now using A used c. The company has spent and expensed for tax purposes $3 million on research related to the new d. The new product will cut into sales of some of the firm's other products equipment dealer has offered to buy the equipment product. These funds proposed in the future. cannot be recovered, but the research may benefit other projects that might be e. If the project is accepted, the company must invest an additional $2 million in met operating working capital. However, all of these funds will be recovered at the end of the project's life 19. Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method puts the other one first. In theory, such conflicts should be resolved in favor of the project with the higher NPV False 20. The cost of capital used in capital budgeting should reflect the supplied funds a firm uses to acquire assets average cost of the various sources of investor- b. False
