Part 1

It is Monday and you are the Chief Financial Officer (CFO) of a firm that produces widgets. You arise at 5am without an alarm clock and immediately begin reading the Wall Street Journal and checking emails. This is an important week because the Federal Reserve is making a major announcement regarding interest rates and inflation and you are curious how this announcement will impact your firm and the current projects that the firm is looking to invest into. Answer the next 2 questions:

1.You are concerned that recessionary pressures will make a current project to invest in a new robot more risky than indicated by the current WACC because there is more uncertainty with project revenue. What should the CFO do if the project is more risky than the current WACC?

A. Adjust the WACC lower and accept the project if it has a negative NPV.

B. Adjust the WACC higher and reject the project if has a negative NPV.

C. Adjust the WACC higher and accept the project if it has a negative NPV.

D. Adjust the WACC lower and reject the project if it has a positive NPV.

2. Because of the uncertainty in the economy with recessionary pressures, you are considering stress testing your project cash flows by using a risk analysis tool. You would like to assess the probability of achieving a positive NPV by running thousands of scenarios. What is this type of risk analysis:

A. Simulation Analysis

B. Sensitivity Analysis

C. Situational Analysis

D. Scenario Analysis