A Firm Is Considering a New Project Whose Risk Is

question 21

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 IRR 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 the project's higher-than- average risk.

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Definitions:

Title and Possession

Legal terms that refer to the ownership (title) of an asset and the control or occupation of it (possession).

Money

A medium of exchange, unit of account, and store of value that facilitates the transaction of goods and services.

Defective Furnace

A faulty heating unit that fails to operate as expected or is unsafe.

Malfunctioned

Refers to something that has failed to function properly or as expected.