Projects differ in risk, and risk analysis is a critical component of the capital budgeting process. Consider the case of United Recycling Inc.: United Recycling Inc. is one of the largest recyclers of glass and paper products in the United States. The company is looking into expanding into the cardboard recycling business. The company's CFO has performed a detailed analysis of the proposed expansion. The company's CFO hired a third-party consulting firm to estimate the cost per ton of processing the cardboard. The consulting firm's cost estimate for processing the cardboard was significantly higher than what the CFO had been using in his financial model Based on the information given, determine which of the statements is correct. o when the CFO adjusts the cost per ton of processing the cardboard, the project's NPV will decrease. O when the CFO adjusts the cost per ton of processing the cardboard, the project's NPV will increase. Evaluating risk is an important part of the capital budgeting process. Which of the following is measured by the variability of the project's expected returns? O Corporate, or within-firm, risk O Stand-alone risk O Market, or beta, risk The problem with using less risky than a firm's a when trying to adjust for projects that are more risky or ments are extremely subjective and difficult to justify. stand-alone risk stand-alone risk market risk a risk-adjusted cost of capital corporate, or within-firm, risk Understanding risks that affect projects and the impact of risk consideration Yatta Net International has manufacturing, distribution, retail, and consulting divisions. Projects undertaken by the manufacturing and distribution divisions tend to be low-risk projects, because these divisions are well established and have predictable demand. The company started its retail and consulting divisions within the last year, and it is unknown if these divisions will be profitable. The company knew that opening these new divisions would be risky, but its management believes the divisions have the potential to be extremely profitable under favorable market conditions. The company is currently using its WACC to evaluate new projects for all divisions. If Yatta Net International 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 accept too many relatively safe projects. The firm will become less valuable. W. The firm will accept too many relatively risky projects. How do managers typically deal with within-firm risk and beta risk when they are evaluating a potential project? 0 Quantitatively O Subjectively Consider the case of another company. Chrome Printing is evaluating two mutually exclusive projects. They both require a $3 million investment today and have expected NPVs of $600,000. Management conducted a full risk analysis of these two projects, and the results are shown below. Project A Project B $240,000 $360,000 0.9 0.7 Risk Measure Standard deviation of project's expected NPVs Project beta Correlation coefficient of project cash flows (relative to the firm's existing projects) 0.5 The firm will accept too many relatively safe projects. The firm will become less valuable. O The firm will accept too many relatively risky projects. How do managers typically deal with within-firm risk and beta risk when they are evaluating a potential project? . Quantitatively Subjectively Consider the case of another company. Chrome Printing is evaluating two mutually exclusive projects. They both require a $3 million investment today and have expected NPVs of $600,000. Management conducted a full risk analysis of these two projects, and the results are shown below. Risk Measure Project A Project B $240,000 $360,000 Standard deviation of project's expected NPVs Project beta Correlation coefficient of project cash flows (relative to the firm's existing projects) 0.9 0.7 0.7 0.5 Which of the following statements about these projects' risk is correct? Check all that apply. Project B has more market risk than Project A. Project A has more corporate risk than Project B. U Project A has more market risk than Project B. U Project B has more corporate risk than Project A. DDDD