Chama cha CA Vini. Uintan. Daalumaston Dannin alindasan Uala AD A O REY Tin OA9

Question

Chama cha CA Vini. Uintan. Daalumaston Dannin alindasan Uala AD A O REY Tin OA9 DNA A := 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 company's CFO has performed a detailed analysis of the proposed expansion. The selling price of recycled cardboard can fluctuate dramatically, depending on the market conditions. By creating models that used different assumptions for the selling price of recycled cardboard but keeping all other inputs in the model the same, the CFO demonstrated the effect of fluctuations in the price of recycled cardboard. Based on the information given, determine which of the statements is correct. O The company's CFO was conducting a sensitivity analysis on the project's financial model. O The company's CFO performed a scenario analysis on the project's financial model. Evaluating risk is an important part of the capital budgeting process. Which of the following represents the project's risk to the corporation as opposed to investors' risks? O Corporate, or within-firm, risk O Market, or beta, risk O Stand-alone risk The problem with using when trying to adjust for projects that are more risky or less risky than a firm's average project is that these adjustments are extremely subjective and difficult to justify.

Explanation / Answer

Sensitivity analysis is done by changing one variable while keeping other variables constant in order to understand the impact of a particular variable on the outcome. Hence, the CFO was doing a sensitivity analysis.

Project risk is represented by beta or market risk for the project.

That is the problem of using weighted average cost of capital (WACC).

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