The way basic NPV approach of capital budgeting should deal with the problems of project risk and shortcomings of this model.

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Answer 1

Question

Chapter 11, Problem 1QTD

Summary Introduction

To discuss: The way basic NPV approach of capital budgeting should deal with the problems of project risk and shortcomings of this model.

Expert Solution & Answer

Explanation of Solution

The concept of basic NPV (Net present value) addresses risk by using discounted projected cash flows from a project through cost of capital of the company. This rate of discount should be based on the average amount of risk at the company. To the point that a project has more or less of average risk, the utilization of the company’s cost of capital doesn’t make the necessary changes to the risk.

Also, the simple model does not specifically consider the volatility of the returns from a project.

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Students have asked these similar questions

WHAT ARE THE PROBLEMS WITH IRR APPROACH TO CAPITAL BUDGETING?

e) How does the basic net present value model of capital budgeting deal with the problem of project risk? What are the shortcoming of this approach

How is capital budgeting similar to security valuation? How is it different?

Answer 2

Question

Chapter 11, Problem 1QTD

Summary Introduction

To discuss: The way basic NPV approach of capital budgeting should deal with the problems of project risk and shortcomings of this model.

Expert Solution & Answer

Explanation of Solution

The concept of basic NPV (Net present value) addresses risk by using discounted projected cash flows from a project through cost of capital of the company. This rate of discount should be based on the average amount of risk at the company. To the point that a project has more or less of average risk, the utilization of the company’s cost of capital doesn’t make the necessary changes to the risk.

Also, the simple model does not specifically consider the volatility of the returns from a project.

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Answer 3

Question

Chapter 11, Problem 1QTD

Summary Introduction

To discuss: The way basic NPV approach of capital budgeting should deal with the problems of project risk and shortcomings of this model.

Expert Solution & Answer

Explanation of Solution

The concept of basic NPV (Net present value) addresses risk by using discounted projected cash flows from a project through cost of capital of the company. This rate of discount should be based on the average amount of risk at the company. To the point that a project has more or less of average risk, the utilization of the company’s cost of capital doesn’t make the necessary changes to the risk.

Also, the simple model does not specifically consider the volatility of the returns from a project.

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Answer 4

Question

Chapter 11, Problem 1QTD

Summary Introduction

To discuss: The way basic NPV approach of capital budgeting should deal with the problems of project risk and shortcomings of this model.

Expert Solution & Answer

Explanation of Solution

The concept of basic NPV (Net present value) addresses risk by using discounted projected cash flows from a project through cost of capital of the company. This rate of discount should be based on the average amount of risk at the company. To the point that a project has more or less of average risk, the utilization of the company’s cost of capital doesn’t make the necessary changes to the risk.

Also, the simple model does not specifically consider the volatility of the returns from a project.

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Answer 5

Chapter 11, Problem 1QTD

Summary Introduction

To discuss: The way basic NPV approach of capital budgeting should deal with the problems of project risk and shortcomings of this model.

Expert Solution & Answer

Explanation of Solution

The concept of basic NPV (Net present value) addresses risk by using discounted projected cash flows from a project through cost of capital of the company. This rate of discount should be based on the average amount of risk at the company. To the point that a project has more or less of average risk, the utilization of the company’s cost of capital doesn’t make the necessary changes to the risk.

Also, the simple model does not specifically consider the volatility of the returns from a project.

Answer 6

Chapter 11, Problem 1QTD

Summary Introduction

To discuss: The way basic NPV approach of capital budgeting should deal with the problems of project risk and shortcomings of this model.

Expert Solution & Answer

Explanation of Solution

The concept of basic NPV (Net present value) addresses risk by using discounted projected cash flows from a project through cost of capital of the company. This rate of discount should be based on the average amount of risk at the company. To the point that a project has more or less of average risk, the utilization of the company’s cost of capital doesn’t make the necessary changes to the risk.

Also, the simple model does not specifically consider the volatility of the returns from a project.

Answer 7

Chapter 11, Problem 1QTD

Summary Introduction

To discuss: The way basic NPV approach of capital budgeting should deal with the problems of project risk and shortcomings of this model.

Answer 8

Expert Solution & Answer

Explanation of Solution

The concept of basic NPV (Net present value) addresses risk by using discounted projected cash flows from a project through cost of capital of the company. This rate of discount should be based on the average amount of risk at the company. To the point that a project has more or less of average risk, the utilization of the company’s cost of capital doesn’t make the necessary changes to the risk.

Also, the simple model does not specifically consider the volatility of the returns from a project.