A Firm Is Considering a New Project Whose Risk Is

question 48

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) 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:

Cognitive Dissonance Theory

A psychological theory that explains the discomfort that arises from holding two conflicting beliefs simultaneously, leading individuals to change their attitudes, beliefs, or behaviors to reduce the discomfort.

Role-Playing Theory

A theory that suggests individuals adopt certain behaviors or attitudes when they are assigned specific roles, influencing their social interactions and identity.

Racial Bias

A form of prejudice that results in the unjust favoring or disadvantaging of individuals based on race.

Police Officers

Law enforcement personnel tasked with maintaining public order, enforcing laws, and preventing, detecting, and investigating criminal activities.