5. Risk analysis in capital budgeting Projects differ in risk, and risk analysis

Question

5. 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.: Aa Aa United Recycling Inc. is ane of the largest recyclers of glass and paper products in the United States. The company is laoking into expanding into the cardboard recycling business. The company's CFO has performed a detailed analysis of the proposed expansion The selling price of recycled cardboard can uctuate dramatically, depending on the market conditions. By creating models that used different assumptions for the selling price of recycled cardboard but keeping all ather inputs in the model the same, the CFO demonstrated the effect of uctuations in the price ofrecycled cardboard. Based on the information given, determine which of the statements is correct. The company's CFO performed a scenario analysis on the project's financial model. The company's CFO was conducting a sensitivity analysis on the project's financial model. Evaluating risk is an important part of the capital budgeting process. which of the following is measured by its effect on the firm's beta coefficient? Stand-alone risk O Market, or beta, risk O Corporate, or within-firm, risk O Risk-adjusted cost of capital The problem with using less risky than a firm's average project is that these adjustments are extremely subjective and difficuit to justify. when trying to adjust for projects that are more risky or

Explanation / Answer

Sensitivity analysis is done keeping all other inputs constant

Market risk is measured by effect on beta coefficient

The problem with using risk adjusted cost of capital when trying to adjust for projects

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