10.Which one of the following statements best describes the most likely impact that a profitable abandonment option would have on a project's expected cash flow and risk? a. The PV of expected cash flows increases and risk increases. b. The PV of expected cash flows decreases and risk decreases. c. The PV of expected cash flows increases and risk decreases. d. The PV of expected cash flows decreases and risk increases. e. No impact on the PV of expected cash flows, but risk will increase.

10.Which one of the following statements best describes the most likely impact that a profitable abandonment option would have on a project's expected cash flow and risk? a. The PV of expected cash flows increases and risk increases. b. The PV of expected cash flows decreases and risk decreases. c. The PV of expected cash flows increases and risk decreases. d. The PV of expected cash flows decreases and risk increases. e. No impact on the PV of expected cash flows, but risk will increase.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 3QTD

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9. When we use the WACC to assess a project, we assume that the ________ ratio does not change. A. reward to systematic risk B. risk to reward C. debt to equity D. volatility to systematic risk
16. Which of the following statements regarding the net present value rule and the rate of return rule is false? A. Accept a project if NPV > cost of investment.B. Accept a project if NPV is positive.C. Accept a project if return on investment exceeds the rate of return on an equivalent-risk investment in the financial market.D. Reject a project if NPV is negative.
Consider the following two statements concerning risk analysis: 1. Sensitivity analysis provides clear decision rules concerning acceptance or rejection of an investment project. 2. The risk-adjusted discount rate adds a risk premium to the expected rate of inflation to deriv a discount rate for investment projects. Which one of the following combinations (true/false) relating to the above statements is correct? O a. Statement 1 True Statement 2 False O b. none of the answer provided are correct Statement 1 True Statement 2 True Statement 2 False c. d. Statement 1 False O e. Statement 1 False Statement 2 True
1. Define the components of holding period return. Can any of these components be negative? 2. How do you understand an investment risk and what statistic tools can be used to measure it?
18. If one were to plot the expected returns of assets (y axis) against the systematic risk (x-axis) and construct a frontier of investments, then the indifference curves of a risk-neutral investor would: Select one or more: a. Would be straight horizontal lines b. Would be undefined and impossible to plot on such a diagram c. Would increase in utility as you go up along the y-axis d. Would be straight vertical lines e. Coincide over top the efficient frontier boundary at all points f. Would increase in utility as you go left along the x-axis
Which of the following statements is CORRECT? a. If a project with normal cash flows has an IRR greater than the cost of capital, the project must also have a positive NPV. b. If a project with normal cash flows has an IRR less than the cost of capital, the project must have a positive NPV. c. If the NPV is negative, the IRR must also be negative. d. A project's MIRR can never exceed its IRR. e. If Project A's IRR exceeds Project B's, then A must have the higher NPV.
11. Which one of the following statements is most CORRECT? a. Real options change the risk, but not the size, of projects' expected NPVs. b. Very few projects have real options. They are theoretically interesting but of little practical importance. c. Real options are more valuable when there is very little uncertainty about the true values of future sales and costs. d. Real options change the size, but not the risk, of projects' expected NPVs. e. Real options can reduce the cost of capital that should be used to discount a project's expected cash flows.
Which of the following statements is true about the internal rate of return? a. It is the interest rate that sets a project's net present value at zero. b. It is the minimal acceptable interest rate on an investment. c. It is the difference between the present value of the cash inflows and outflows associated with a project. d. It is the difference between the present value of a cash outflow and the depreciation associated with an asset.
6. Which of the following statements is / are TRUE about the payback period method of investment appraisal? (i) It uses discounted profits (ii) It may result in a project with a negative NPV being accepted (iii) It looks at the whole life of the project (iv) It favours lower risk projects (on the basis that risk is time related) a (i) and (iii) b (i) and (iv) c (ii) and (iv) d (ii) and (iii)
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Another name for the expected value of an investment would be: Answer a. The mean value b. The upper-end value c. The certain value d. The risk-free value
Another name for the expected value of an investment would be: a. The mean value b. The risk-free value c. The certain value d. The upper end value