A Firm Is Considering a New Project Whose Risk Is

question 69

Multiple Choice

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

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Definitions:

Temper Tantrums

Emotional outbursts, often observed in children, that are characterized by yelling, crying, and aggressive or defiant behavior.

Anal Stage

A phase in Freudian psychosexual development centered around the child's control over bowel movements, typically occurring from age 18 months to three years.

Defense Mechanism

Psychological strategies used by individuals to cope with reality and maintain a self-image.

Repression

A defense mechanism that involves unconscious denial of the existence of something that causes anxiety.