Risk And Refinements In Capital Budgeting. Test bank Questions and Answers of Chapter 12 Risk and Refinements in Capital Budgeting.

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Answer BLevel of Difficulty 3Learning Goal 2Topic Sensitivity Analysis Chapter 10Risk and Refinements In Capital Budgeting425A firm is considering investment in a capital project which is described below The firm’s cost of capital is18 percent and the riskfree rate is 6 percent.

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Risk & Refinements in Capital Budgeting fLearning Objectives Understand the importance of explicitly recognizing risk in the analysis of capital budgeting projects Discuss breakeven cash flow sensitivity and scenario analysis and simulation as behavioral approaches for dealing with risk and the unique risks facing multinational companies.

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RISK AND REFINEMENT IN CAPITAL BUDGETING fINTRODUCTION OF RISK TO CAPITAL BUDGETING Risk is the uncertainty about a projects future profitability The Risk degree of variability of cash flows results almost entirely from the uncertainty about future cash inflows The initial outflow is generally known fINTRODUCTION OF RISK TO CAPITAL BUDGETING.

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12 Risk and Refinements in Capital Budgeting Learning Goals LG 1 Understand the importance of recognizing risk in the analysis of capital budgeting projects LG 2 Discuss risk and cash inflows scenario analysis and simulation as behavioral approaches for dealing with risk LG 3 Review the unique risks that multinational companies face.

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The firm’s assets are like a portfolio of assets If an accepted capital budgeting project has a risk different from the average risk of the assets in the firm it will cause a shift in the overall risk of the firm Chapter 10 Risk and Refinements in Capital Budgeting 253 2.