Risk Management and Capital Budgeting

Question 1

when a high degree of inflation is expected in the future - what investment performs best

Answer 1

Precious Metals

Question 2

A downward sloping curve means that

Answer 2

short-term rates are higher than intermediate-term rates which are higher than long-term rates

Question 3

Net cash flows times present value for each year and add up until you recover costs

Answer 3

Calculating Discounting Payback period

Question 4

Project costs divided by annual cash flows

Answer 4

PV of annuity factor calculation is

Question 5

what measures systematic risk of the investment

Answer 5

Beta

Question 6

Payback method

Answer 6

imply determines when the initial investment is recovered on an undiscounted basis.

does not consider the time value of money

ignores all cash flows after the end of the payback period

Question 7

what are based on predictions of future income or cash flows

Answer 7

all capital budgeting methods

Question 8

what allows the importer to lock in the price of British pounds at the current exchange rate.

Answer 8

call option

Question 9

is a financial contract that derives its value from the performance of an underlying,

such as an asset, index, or interest rate.

Answer 9

is A derivative

Question 10

what would decrease the internal rate of return of a proposed asset purchase

Answer 10

1) either decrease or extend the cash flows from,
2) or increase the initial cost of, the investment

Decreasing Tax Credits on the asset = #2