Expected value of profit Standard deviation of profit Coefficient of variation of profit Project A $670 175 0.26 Project iB ST00 370 0.53 Which project has a lower absolute risk level Which project h a lower relative rsk evel Whach project would you advise the firm to choose? Explain your answers lower relative risk leval w

Expected value of profit Standard deviation of profit Coefficient of variation of profit Project A $670 175 0.26 Project iB ST00 370 0.53 Which project has a lower absolute risk level Which project h a lower relative rsk evel Whach project would you advise the firm to choose? Explain your answers lower relative risk leval w

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 3QTD

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How would you rank the following alternative risky investment projects? Explain your answer carefully. Project L Payoff Probability Payoff Probability Payoff Probability Project K Project M 4 0.25 1 0.4 1 0.5 5 0.5 6. 0.3 6. 0.25 12 0.25 8. 0.3 8. 0.25
The Ajax Company uses a portfolio approach to manage their research and development (RD) projects. Ajax wants to keep a mix of projects to balance the expected return and risk profiles of their RD activities. Consider a situation in which Ajax has six RD projects as characterized in the table. Each project is given an expected rate of return and a risk assessment, which is a value between 1 and 10, where 1 is the least risky and 10 is the most risky. Ajax would like to visualize their current RD projects to keep track of the overall risk and return of their RD portfolio. a. Create a bubble chart in which the expected rate of return is along the horizontal axis, the risk estimate is on the vertical axis, and the size of the bubbles represents the amount of capital invested. Format this chart for best presentation by adding axis labels and labeling each bubble with the project number. b. The efficient frontier of RD projects represents the set of projects that have the highest expected rate of return for a given level of risk. In other words, any project that has a smaller expected rate of return for an equivalent, or higher, risk estimate cannot be on the efficient frontier. From the bubble chart in part a, which projects appear to be located on the efficient frontier?
Wolff Enterprises must consider one investment project using the capital asset pricing model (CAPM). Relevant information is presented in the following table. Item Rate of return Beta, b Risk-free asset 9% 0.00 Market portfolio 14% 1.00 Project 1.74 a. Calculate the required rate of return for the project, given its level of nondiversifiable risk. b. Calculate the risk premium for the project, given its level of nondiverisifiable risk.
(i) Calculate the expected return and standard deviations for Project Alpha and Project Beta. (ii) Calculate the coefficient variation of both projects. Assuming Jerry is a risk-averse investor, recommend the project that he should accept. (iii) Explain the meaning of standard deviation and coefficient of variation to an investor (iv) Factoring is one of the sources of short-term financing. Discuss SIX (6) benefits of factoring (v) Differentiate between business risk and financial risk.
If a firm is planning for an international project, the manager should understand that the project's NPV would be ______ by the size of the initial investment and the project's required rate of return. A. positively; negatively B. positively; positively C. negatively; negatively D. negatively; positively
Which of the following statements is CORRECT? a. An NPV profile graph shows how a project's payback varies as the cost of capital changes. b. The NPV profile graph for a normal project will generally have a positive (upward) slope as the life of the project increases. c. An NPV profile graph is designed to give decision makers an idea about how a project's risk varies with its life. d. An NPV profile graph is designed to give decision makers an idea about how a project's contribution to the firm's value varies with the cost of capital. e. We cannot draw a project's NPV profile unless we know the appropriate WACC for use in evaluating the project's NPV. Provide explanation for the choice
What Suppose your organization is deciding which of four projects to bid on. Information on each is in the table below. Assume that all up-front investments are not recovered, so they are shown as negative profits. Draw a diagram and calculate the EMV for each project. Write a few paragraphs explaining which projects you would bid on. Be sure to use the EMV information and your personal risk tolerance to justify your answer
The net present value (NPV) method estimates how much a potential project will contribute to Business ethics/Shareholders Wealth/Employee Benefits, and it is the best selection criterion. The Smaller/Larger the NPV, the more value the project adds; and added value means a Higher/Larger stock price. In equation form, the NPV is defined as: CFt is the expected net cash flow at Time t, r is the project's risk-adjusted cost of capital, N is its life, and cash outflows are treated as negative cash flows. The NPV calculation assumes that cash inflows can be reinvested at the project's risk-adjusted RD/RS/WACC. When the firm is considering independent projects, if the project's NPV exceeds zero the firm should Accept/Reject the project. When the firm is considering mutually exclusive projects, the firm should accept the project with the Lowest Positive/Lowest Negative/Highest Postive/ Highest Negative NPV.Quantitative Problem: Bellinger Industries is considering two projects for inclusion…
Refer to the table below to answer the following question. Project Initial Investment NPV P 200 22 Q 180 26 R 185 38 S 380 10 The project with highest Profitability Index is Project P Project Q Project R Project S
Which of the following statements is CORRECT? a. The NPV profile graph for a normal project will generally have a positive (upward) slope as the life of the project increases. b. An NPV profile graph shows how a project's payback varies as the cost of capital changes. O c. An NPV profile graph is designed to give decision makers an idea about how a project's contribution to the firm's value varies with the cost of capital. d. An NPV profile graph is designed to give decision makers an idea about how a project's risk varies with its life. e. We cannot draw a project's NPV profile unless we know the appropriate WACC for use in evaluating the project's NPV.
Which of the following statements is correct? a. Since investors prefer more return and less risk, one will never hold a dominated asset in the risk-return sense. In other words, if asset A has a higher expected return and lower standard-deviation than asset B, then investors would only hold asset A in their optimal portfolio. b. The IRR method correctly ranks mutually exclusive projects. c. When an investment project is evaluated today, the spending that occurred in the last year has to be included in the NPV analysis. d. The payback period criterion properly considers the time value of money. e. When there are two mutually exclusive projects, the project with the highest NPV should be chosen.
A financial analyst is evaluating the following projects, which are mutually exclusive, meaning that only one of them can be chosen. Based on financial theory and the NPV criterion, which one of these projects should be chosen over the other three? Time A C D -26,000 -7,200 -14,500 -19,600 8,100 11,900 8,100 2,360 8.600 1,150 10,000 2,120 5,700 800 11,100 11,00O0 4,200 850 1,130 9,800 12,480 9,700 830 11,600 Discount 13.9% 13.9% 13.9% 13.9% Rate O Project A O Project B O Project C O Project D O12 345