Question 6

1. Many firms combine net present value and payback when analyzing project risk. Which of the following statements is/are correct? I. Both payback and net present value consider the frequency of cash flows. II. Both payback and net present can be adjusted for risk.

   		a. I only
   		b. II only
   		c. Both I and II
   		d. Neither I nor II

Question 7

1. A weakness of the net present value/payback method is:

   		a. It is a complicated calculation
   		b. It is subjective
   		c. It is directly related to the variability of returns from a project
   		d. Because it recognizes the riskiness of various projects, it can develop multiple outcomes

Question 8

1. The risk of an investment project is defined in terms of the potential ____ of its returns.

   		a. certainty
   		b. size
   		c. variability
   		d. timing

0.4 points

1. The type of analysis that models some event and requires that estimates be made of the probability distribution of each cash flow element is:

   		a. scenario
   		b. sensitivity
   		c. simulation
   		d. net present value/payback approach

Question 10

1. Calco is a multi-divisional firm with a weighted cost of capital of 14 percent and a risk-adjusted discount rate for its can division of 17 percent. A planned expansion in the can division requires a net investment of $170,000 and results in expected cash inflows of $42,000 a year for seven years. Should Calco invest in this expansion?

   		a. Yes, NPV = $10,096
   		b. Yes, NPV = $ 9,896
   		c. No, NPV = -$5,276
   		d. No, NPV = -$9,896

Question 11

1. A major disadvantage of the risk-adjusted discount rate approach is that it

   		a. can lead to selecting only above-average risk projects
   		b. provides the decision maker with a range of numbers
   		c. can lead to selecting only below-average risk projects
   		d. is difficult to estimate the appropriate risk premium for a project

Question 12

1. Sensitivity analysis is a procedure that can be used in the capital budgeting process to indicate how sensitive the ____ is to changes in a particular variable.

   		a. probability
   		b. return distribution
   		c. net present value
   		d. standard deviation

Question 13

1. A major problem with using the risk-adjusted discount rate approach is the determination of

   		a. the beta value for the firm
   		b. the firm's weighted cost of capital
   		c. the firm's required rate of return
   		d. beta values for individual projects

0.4 points

Question 14

1. The DMT Company is financed entirely with equity. DMT has a beta of 1.20 and the current risk-free rate is 9.5 percent. If the expected market return is 14 percent, what rate of return should DMT require on a project of average risk?

   		a. 14.9%
   		b. 15.4%
   		c. 14.0%
   		d. 12.0%

0.4 points

Question 15

1. The risk assessment technique that considers the impact of simultaneous changes in key variables on the desirability of an investment project is ____.

   		a. sensitivity analysis
   		b. simultaneous equations
   		c. scenario analysis
   		d. RADR analysis