Firm Is Considering a New Project Whose Risk Is Greater

question 33

Multiple Choice

firm is considering a new project whose risk is greater than the risk of the firm's average project, based on all methods for assessing risk.In evaluating this project, it would be reasonable for management to do which of the following?

• A)Increase the estimated IRR of the project to reflect its greater risk.
• B)Increase the estimated NPV of the project to reflect its greater risk.
• C)Reject the project, since its acceptance would increase the firm's risk.
• D)Ignore the risk differential if the project would amount to only a small fraction of the firm's total assets.
• E)Increase the cost of capital used to evaluate the project to reflect its higher-than-average risk.

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Definitions:

Fair Value Method

An accounting approach that assesses and assigns a price to a company's assets and liabilities based on current market value.

Effective Interest Method

A method of calculating the amortized cost of a bond or loan on the basis on an effective interest rate rather than the nominal rate.

Cash Interest

Interest payments made in cash to creditors or bondholders during a specific period.