A Firm Is Considering the Purchase of an Asset Whose

question 20

Multiple Choice

A firm is considering the purchase of an asset whose risk is greater than the current risk of the firm, based on any method for assessing risk. In evaluating this asset, the decision maker should

• A) Increase the IRR of the asset to reflect the greater risk.
• B) Increase the NPV of the asset to reflect the greater risk.
• C) Reject the asset, since its acceptance would increase the risk of the firm.
• D) Ignore the risk differential if the asset to be accepted would comprise only a small fraction of the total assets of the firm.
• E) Increase the cost of capital used to evaluate the project to reflect the higher risk of the proj¬ect.

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Definitions:

Government Contracts

Agreements made between a private company and the government to provide goods or services.

Mechanization

The process of using machinery and technology to perform tasks that were previously done manually.

Slave-Owning Indians

Indigenous peoples in the Americas who owned slaves, a practice influenced by European colonization.

Confederacy

The group of eleven southern states that seceded from the United States from 1860-1861, forming the Confederate States of America and initiating the Civil War.