QUESTION 5 After finishing the projects evaluation, Moon made the following statement. However, Caleb was not sure whether he agrees with the statements. Concept 1: When rationing capital, it is better to choose the portfolio of investments that maximizes the company NPV than the portfolio that maximizes the company IRR Concept 2: Project betas should be used for establishing the required rate of return whenever the projects beta is different from the companys beta. Concept 3: "I analyzed my project using scenarios for the base case, best case, and worst case. I computed break-evens and degrees of operating leverage. I did sensitivity analysis and simulation analysis. I computed NPV, IRR, payback and Profitability Index. In the end, I have over a hundred different estimates and am more confused than ever. I would have been better off just sticking with my first estimate and going by my gut reaction." Caleb tels Moonn that -the purpose of evaluating an NPV estimate or other decision criteria is to determine the reasonableness of it. If done appropriately, the added analysis will reinforce either the degree of comfort or the degree of discomfort about a project. At the end of the day, this type of analysis reveals both the weaknesses and the strengths of a project. In addition, it helps isolate potential trouble areas and sharpens the focus on which variables are most vital for forecasting. The very nature of the process still leaves a great deal of uncertainty even after all of the analysis is complete. However, eventually, the analyst should be better informed and more comfortable in making a decision, not less so.

Are the statements identified as Concept 1 and Concept 2 correct?

A. No for Concept 1, but yes for Concept 2.

B. No for Concepts 1 and 2.

C. Yes for Concept 1, and 2.

QUESTION 6 With respect to Concept 3, are Moon nd Caleb correct?

A. Moonn's statement is correct

B. Caleb's statement is corect

C. Neither Moonn nor Caleb is correct