Group Presentation 3: Risk and Refinements in Capital Budgeting

Question 1

In capital budgeting, risk refers to:

Answer 1

A. the degree of variability of the cash inflows
B. the chance that the net present value will be greater than zero
C. the degree of variability of the initial investment
D. the chance that the internal rate of return will exceed the cost of capital
Ans: A

Question 2

When unequal-lived projects are mutually exclusive…

Answer 2

A. the impact of differing lives must be considered because the projects do not provide service over comparable time periods
B. select the project that has the highest ANPV
C. divide the net present value by the present value of annuity factor corresponding to the life of the project
D. All of the above
Ans: D

Question 3

What is break even cash inflow?

Answer 3

A. the cash inflow is equal to zero
B. the cash inflow is negative
C. the min level of cash inflow necessary for a project to be acceptable
D. the max level of cash inflow necessary for a project to be acceptable
Ans: C

Question 4

2 opportunities to adjust the present value of cash inflows for risk exist:

i) the cash inflows can be adjusted
ii) the discount rate can be adjusted
iii) the cash outflows can be adjusted

Answer 4

A. i and ii
B. i, ii and iii
C. ii and iii
D. none of the above
Ans: A

Question 5

Name the risk that fulfills those conditions.

i. the risk for which owners of the assets are rewarded
ii. the relevant risk in CAPM
iii. measured using beta

Answer 5

A. Political risk
B. Nondiversifiable risk
C. Exchange rate risk
D. Diversifiable risk
Ans: B (systematic risk), thus investors should be rewarded

Question 6

Which of the following are behavioral approaches?

i) Breakeven analysis (NPV = 0)
ii) Scenario analysis
iii) Simulation
iv) Risk-adjusted discount rates

Answer 6

A. i, ii and iii
B. i, ii and iv
C. i, iii and iv
D. i, ii, iii and iv
Ans: A

Question 7

Which of the following is an approach to evaluating unequal-lived projects that converts the net PV of unequal-lived, mutually exclusive projects into an equivalent annual amount in NPV terms.

Answer 7

A. Payback period
B. Annualized net present value (ANPV)
C. IRR
D. Net present value
Ans: B

Question 8

Which of the following statements regarding NPV is true?

Answer 8

A. If NPV is +ve, the project is expected to earn more than the firm’s cost of capital
B. Accepting -ve NPV projects will reduce shareholders’ wealth
C. If the NPV if +ve, the project’s cost is less than the project’s expected benefit
D. All of the above
Ans: D

Question 9

A significant advantage of the net present value is that it_

Answer 9

A. fully considers time value of money
B. account the profit in the analysis
C. takes into consideration the yield to maturity
D. none of the above
Ans: A

Question 10

Which of the following statement regarding NPV is true?

Answer 10

A. An investment should be accepted if, and only if, the NPV equals the initial investment
B. An investment w/ greater cash inflows than outflows, regardless of when the cash flows occur, will always have a positive NPV and therefore should always be accepted
C. An investment should be accepted if, and only if, the NPV equals zero
D. An investment should be accepted if the NPV is positive and rejected if it is negative
Ans: D