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:

Consequential Damages

Damages that do not directly flow from an act but result as a secondary consequence, often relating to lost profits or revenue.

Public Policy

A system of laws, regulatory measures, courses of action, and funding priorities concerning a given topic promulgated by a governmental entity or its representatives.

Breach Of Warranty

The failure to fulfill the terms of a promise or guarantee made about the quality or durability of a product or service.

Strict Liability In Tort

A legal doctrine that holds an individual or entity liable for damages and loss, regardless of fault, in certain types of hazardous activities.