A Firm Is Considering the Purchase of an Asset Whose

question 24

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) decrease the internal rate of return (IRR) of the asset to reflect the greater risk.
• B) decrease the net present value 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 required rate of return from the project to reflect the higher risk of the project.

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Definitions:

Demand Curve

A graph showing the relationship between the price of a good and the quantity demanded by consumers at those prices.

Foreign Exchange

The global market for trading currencies, enabling the conversion of one currency into another.

U.S. Dollar

The currency unit of the United States, widely used globally in international trade and as a reserve currency.

Foreign Exchange

The exchange of one currency for another or the global market where currencies are traded.