Question: PLEASE HELP ANSWER QUESTIONS BELOW: 1. If a firm is evaluating a new project that has less risk than the average project risk for the
PLEASE HELP ANSWER QUESTIONS BELOW:
1.
| If a firm is evaluating a new project that has less risk than the average project risk for the company, which of the following statements most correctly identifies the possible outcome if they use the firm-level WACC as the discount rate? | ||||||||||
| A | Based on the calculated NPV for the project, the company might accept the project even though the projected cash flows represent a negative NPV at the true risk-adjusted discount rate. | |||||||||
| B | Based on the calculated NPV for the project, the company might reject the project even though the projected cash flows represent a positive NPV at the true risk-adjusted discount rate. | |||||||||
| C | Based on the calculated NPV for the project, it is equally likely that the company might reject the project even though it should have been accepted or accept the project even though it should have been rejected based on the NPV at the true risk-adjusted discount rate. | |||||||||
| D | Based on the calculated NPV for the project, the firm would always accept the correct projects and reject the correct projects. | |||||||||
2.
| The firm you are working for has a hard ration in place that limits their spending on new projects to $400,000. Given the below options, which projects should the firm choose (from a purely financial perspective)? Assume the below choices are the only options and that uninvested capital gets no return. | ||||||||||
| Investment | NPV | |||||||||
| Project 1 | $200,000 | $24,000 | ||||||||
| Project 2 | $250,000 | $35,000 | ||||||||
| Project 3 | $150,000 | $21,000 | ||||||||
| Project 4 | $400,000 | $44,000 | ||||||||
| A | Project 1 and 2 only | |||||||||
| B | Project 1 and 3 only | |||||||||
| C | Project 2 and 3 only | |||||||||
| D | Project 4 only | |||||||||
| E | Projects 1, 2, 3, and 4 | |||||||||
3.
| Firm XYZ is evaluating a new project. Which of the following cash flows should be included in the cash flows for evaluating the project for capital budgeting purposes? | ||||||||||
| CF 1 | The acceptance of this project will increase the sales of a complimentary product within the firm. | |||||||||
| CF 2 | The firm has a contract to pay its CEO $4 million annually. | |||||||||
| CF 3 | The firm has invested $250 million in Research and Development for the project over the past 3 years. | |||||||||
| A | Only CF 1 should be included | |||||||||
| B | Only CF 2 should be included | |||||||||
| C | Only CF 3 should be included | |||||||||
| D | Only CFs 1 and 2 should be included | |||||||||
| E | Only CFs 1 and 3 should be included | |||||||||
| F | Only CFs 2 and 3 should be included | |||||||||
| G | All three cash flows should be included | |||||||||
| H | None of the cash flows should be included |
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