A Firm Is Considering a New Project Whose Risk Is

question 46

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 npv of the project to reflect its greater risk.
• B) reject the project, since its acceptance would increase the firm's risk.
• C) ignore the risk differential if the project would amount to only a small fraction of the firm's total assets.
• D) increase the cost of capital used to evaluate the project to reflect its higher-than-average risk.
• E) increase the estimated irr of the project to reflect its greater risk.

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Definitions:

Cash Payback Period

The time it takes for an investment to generate enough cash flow to recoup the initial outlay.

Net Cash Flows

The difference between the cash inflows and outflows in a company during a specific period, reflecting the company’s overall liquidity position.

Estimated Cost

An approximation of the cost to complete a project, task, or transaction, made in the absence of full information.

Capital Investment Evaluation

The process of assessing the profitability and risk of proposed investments or projects to make informed decisions about capital allocations.