A Firm Is Considering the Purchase of an Asset Whose

question 58

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 required rate of return used to evaluate the project to reflect the higher risk of the project.

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Definitions:

Average costing

Average costing is an inventory costing method where all costs of inventory are averaged over the goods available for sale, providing a medium cost per unit.

Rising prices

An economic phenomenon where the general level of prices for goods and services increases over a period.

Income taxes

Taxes levied by governments on individuals or entities' income.

FIFO

Stands for First In, First Out, an inventory valuation method where goods purchased or produced first are sold or used first.