A Bakery Company Is Considering One Capital Budgeting Project Involving

question 121

Multiple Choice

A bakery company is considering one capital budgeting project involving the replacement of a sophisticated brick oven,and another capital budgeting project involving research and development into synthetic food substitutes.Which of the following statements is MOST correct concerning the risk-adjusted discount rate(s) for the projects?

• A) The rate will likely be higher for the replacement project because the likelihood of success is higher.
• B) The rate will likely be higher for the research and development project because of the uncertainty involved with research and development projects.
• C) The rate should be the same for both projects because they are being considered by one company with the same common shareholders.
• D) The rate should be higher for the replacement project because the company is more certain of the returns from a project similar to their existing business.

---

Definitions:

Payoff Table

A tabular representation of the outcomes of different decisions or strategies under various states of nature or scenarios.

Expected Opportunity Loss

The anticipated loss for not choosing the best possible option or course of action in decision-making processes.

Expected Monetary Value

A statistical technique in decision making used to calculate the average outcome when the future includes scenarios that may or may not happen.

Expected Value

The long-run average value of repetitions of the experiment it represents, often considered as the mean in probability.