2 . Risk analysis in capital budgeting Projects differ in risk, and risk analysis is a critical component of the capital budgeting process. Consider the case of United Recycling Inc.: United Recycling Inc. is one of the largest recyclers of glass and paper products in the United States. The company is looking into expanding into the cardboard recycling business. The companys CFO has performed a detailed analysis of the proposed expansion. The companys CFO used sophisticated software to analyze a large number of scenarios and generate estimated rates of return and risk indexes. Based on the information given, determine which of the statements is correct. The companys CFO used a Monte Carlo simulation to evaluate the projects financial model. Incorrect The companys CFO conducted a sensitivity analysis to evaluate the projects financial model. Points: 0 / 1 Monte Carlo simulation, first used to analyze the mathematics of casino gambling, creates a large number of probable future events on a computer. The computer software then outputs estimated rates of return and risk indexes. A sensitivity analysis measures the percentage change in the net present value (NPV) that results from a given percentage change in one of the input variables while all other variables are held constant at their expected values. Evaluating risk is an important part of the capital budgeting process. Which of the following is measured by its effect on the firms beta coefficient? Stand-alone risk Corporate, or within-firm, risk Market, or beta, risk Incorrect Risk-adjusted cost of capital Points: 0 / 1 Market risk, or beta risk, represents the riskiness of a project to a stockholder who recognizes that the project is only one of the firms assets and that the firms stock is only a part of the investors overall portfolio. In contrast, stand-alone risk refers to the variability of a projects returns in isolation or without considering the effect of the project on the firms other projects (or them on it). Corporate risk, or within-firm risk, takes into account the diversification activities undertaken by the firm when it engages in multiple projects or uses, and holds a variety of different types of assets. When dealing withcorporate, or within-firm, risk Incorrect , diversification is totally ignored. Points: 0 / 1 Stand-alone risk assumes that a particular project is the only asset the fi rm has and that the firm is the only stock in each investors portfolio.