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

Question

4. 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 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 company's CFO hired a third-party consulting firm to estimate the cost per ton of processing the cardboard. The consulting firm's cost estimate for processing the cardboard was significantly higher than what the CFO had been using in his financial model Based on the information given, determine which of the statements is correct. When the CFO adjusts the cost per ton of processing the cardboard, the project's NPV will increase. When the CFO adjusts the cost per ton of processing the cardboard, the project's NPV will decrease. 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 Stand-alone risk

Explanation / Answer

The second statement is correct. As the CFO underestimated the cost of processing, the NPV will decrease because of higher cost.

Project risk to the corporation is represented by corporate or within firm, risk.

Risk-adjusted cost of capital is measured by the project's impact on uncertainty regarding the future.

Related Questions

Navigate

• Browse (All)
• Browse 4
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.