FINANCE CHAPTER 12 QUESTIONS AND ANSWERS
A+ GRADED
Different projects have different levels of risk. As a result, the acceptance of a
particular project generally has an impact on a firm's overall risk.
True
The acceptance of a particular project usually has no impact on a firm's overall
risk.
False
All projects should always use the WACC as the required return for capital
budgeting purposes.
False
Behavioral approaches for dealing with risk include scenario analysis and
simulation.
True
Behavioral approaches for dealing with risk include annualized net present
values and risk-adjusted discount rates.
False
In capital budgeting, risk is the degree of variability of cash flows.
True
In capital budgeting, risk is generally thought of as the chance that NPV and IRR
will provide conflicting recommendations to management.
False
The break even cash inflow is the minimum level of cash inflow necessary for a
project to be acceptable.
True
Projects with a small chance of being acceptable and a broad range of possible
cash flows are riskier than projects having a high chance of being acceptable and
a narrow range of possible cash flows.
True
In capital budgeting, risk refers to a high degree of variability of the initial
investment of a project.
False
Scenario analysis is a statistics-based behavioral approach that applies
predetermined probability distributions and random numbers to estimate risky
outcomes.
False
In capital budgeting, one of the most common scenario approaches is to estimate
the NPVs associated with pessimistic (worst), most likely (expected), and
optimistic (best) estimates of cash inflow.
True
, Scenario analysis is a behavioral approach that evaluates the impact on a firm's
return through simultaneous changes in a number of variables.
True
Scenario analysis is a behavioral approach that uses a number of possible
outcomes to asses the variability of returns.
True
Sensitivity analysis is a statistics-based approach used in capital budgeting to
asses risk by applying predetermined probability distributions and random
numbers to estimate risky outcomes.
False
Simulation is a statistics-based approach used in capital budgeting to get a feel
for risk by applying predetermined probability distributions and random numbers
to estimate risky outcomes.
True
Simulation is an approach that evaluates the impact on return of simultaneous
changes in a number of variables.
False
The output of simulation provides an excellent basis for decision making since it
allows the decision maker to view a continuum of risk-return trade-offs rather
than a single-point estimate.
True
Monte Carlo simulation programs usually build a histogram of the results.
True
Behavioral approaches ________.
A) are used to explicitly recognize project risk
B) are used to get a feel for project risk
C) are not used by rational financial managers
D) are used to quantify the risk
B
Breakeven cash inflow refers to ________.
A) the minimum level of cash inflow necessary for a project to be acceptable, that
is, NPV greater than zero
B) the minimum level of cash inflow necessary for a project to be acceptable, that
is, NPV less than zero
C) the minimum level of cash inflow necessary for a project to be acceptable, that
is, IRR less than zero cost of capital
D) the minimum level of cash inflow necessary for a project to be acceptable, that
is, IRR equals zero
A
In capital budgeting, risk refers to ________.
A) the chance that a project will prove acceptable
B) the conflicting IRR and NPV in a project
C) the degree of variability of initial outlay
D) the uncertainty of cash inflows
D
A+ GRADED
Different projects have different levels of risk. As a result, the acceptance of a
particular project generally has an impact on a firm's overall risk.
True
The acceptance of a particular project usually has no impact on a firm's overall
risk.
False
All projects should always use the WACC as the required return for capital
budgeting purposes.
False
Behavioral approaches for dealing with risk include scenario analysis and
simulation.
True
Behavioral approaches for dealing with risk include annualized net present
values and risk-adjusted discount rates.
False
In capital budgeting, risk is the degree of variability of cash flows.
True
In capital budgeting, risk is generally thought of as the chance that NPV and IRR
will provide conflicting recommendations to management.
False
The break even cash inflow is the minimum level of cash inflow necessary for a
project to be acceptable.
True
Projects with a small chance of being acceptable and a broad range of possible
cash flows are riskier than projects having a high chance of being acceptable and
a narrow range of possible cash flows.
True
In capital budgeting, risk refers to a high degree of variability of the initial
investment of a project.
False
Scenario analysis is a statistics-based behavioral approach that applies
predetermined probability distributions and random numbers to estimate risky
outcomes.
False
In capital budgeting, one of the most common scenario approaches is to estimate
the NPVs associated with pessimistic (worst), most likely (expected), and
optimistic (best) estimates of cash inflow.
True
, Scenario analysis is a behavioral approach that evaluates the impact on a firm's
return through simultaneous changes in a number of variables.
True
Scenario analysis is a behavioral approach that uses a number of possible
outcomes to asses the variability of returns.
True
Sensitivity analysis is a statistics-based approach used in capital budgeting to
asses risk by applying predetermined probability distributions and random
numbers to estimate risky outcomes.
False
Simulation is a statistics-based approach used in capital budgeting to get a feel
for risk by applying predetermined probability distributions and random numbers
to estimate risky outcomes.
True
Simulation is an approach that evaluates the impact on return of simultaneous
changes in a number of variables.
False
The output of simulation provides an excellent basis for decision making since it
allows the decision maker to view a continuum of risk-return trade-offs rather
than a single-point estimate.
True
Monte Carlo simulation programs usually build a histogram of the results.
True
Behavioral approaches ________.
A) are used to explicitly recognize project risk
B) are used to get a feel for project risk
C) are not used by rational financial managers
D) are used to quantify the risk
B
Breakeven cash inflow refers to ________.
A) the minimum level of cash inflow necessary for a project to be acceptable, that
is, NPV greater than zero
B) the minimum level of cash inflow necessary for a project to be acceptable, that
is, NPV less than zero
C) the minimum level of cash inflow necessary for a project to be acceptable, that
is, IRR less than zero cost of capital
D) the minimum level of cash inflow necessary for a project to be acceptable, that
is, IRR equals zero
A
In capital budgeting, risk refers to ________.
A) the chance that a project will prove acceptable
B) the conflicting IRR and NPV in a project
C) the degree of variability of initial outlay
D) the uncertainty of cash inflows
D
