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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
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. When the CFO adjusts the cost per ton of processing the cardboard, the project's NPV will increase. When the CFO adjusts the cost per ton of processing the cardboard, the project's NPV will decrease. Evaluating risk is an important part of the capital budgeting process. Which of the following represents the project's risk to the corporation as opposed to investors' risks? Stand-alone risk Market, or beta, risk Corporate, or within - firm, risk _____ is measured by the project's impact on uncertainty regarding the firm's future returns. Sometimes real options can give managers the flexibility to decide to invest in a project or wait to make a more calculated decision. True or False: The preceding statement is correct. False True Which type of real option allows a project to be expanded if demand turns out to be greater than expected? Expansion option Abandonment option Timing option Flexibility option Consider the following example: Clemens Inc. is considering a $100 million investment in a new line of soft drinks. However, 100 million is a huge investment for Clemens: if things turn bad, it could wipe out the company. A few senior managers have suggested a smaller investment of $20 million to see if the market is as strong as they hope it is. If demand is strong and the opportunity is still available, Clemens will increase its investment at a later date. This example describes a real option to _____. In January 2014, Commonwealth Biofuels LLC opened a production facility that is capable of producing 2 million gallons per year of ethanol from cellulosic material. The company wants to expand and open three more ethanol production facilities within the next two years. The venture capital firm that financed the company's first project has asked the company's management team to perform a post-audit on the initial project. The venture capital firm will use the information from the post-audit to help evaluate the company's plans for expansion. Which of the following would be part of the post-audit? Check all that apply. In instances where the company's estimated costs were different from the actual costs, the management team will need to explain why these differences occurred. The management team will need to compare the projected selling price of ethanol to the actual selling price of ethanol. The management team will need to determine if it wants to use straight-line or accelerated depreciation to depreciate the property, plant, and equipment used in the initial project. When a firm a exhausts its retained earnings and must raise capital from external sources, its weighted average cost of capital (WACC) will _____
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