Question

Question 7 Not yet answered Points out of 1.00 Assume a proposed project is being evaluated using the standard method of estimating the initial investment required, annual revenues and expenses, the salvage value at the end of the project, and the appropriate cost of capital rate. If the analysis is modified by adding the option of abandoning the project after year 1, and by also adding the option to expand the project at the end of year 2, we would expect P Flag question Select one: a. the firm's cost of capital to decrease b. the net present worth of the project to decrease cthe firm's cost of capital to increase. d. the net present worth of the project to increase. Question 8 Not yet answered All of the below would make a project more likely to be accepted, EXCEPT: Points out of 1.00 Select one: a. A higher standard deviation of the net present worth of the project P Flag question b. A higher expected net present worth of the project CA higher net present worth of the project d. A lower variance of the net present worth of the

Answer 1

7.

Answer: c

If the project is abandoned, the initial investment (capital) may not be recovered fully; this creates a loss of capital, indicating an increasing cost of capital.

If the project is expanded, there would be more capital to be invested; more capital means more cost of capital or increasing cost of capital.

Therefore, by adding options as above, cost of capital should increase.

8.

Answer: a

A project is much more preferred if it has lower standard deviation of NPW. Higher standard deviation (SD) is not at all good, since it indicates greater uncertainty to become successful.

Suppose NPW of a project is $20,000 if it has $500 SD it means NPW may deviate at any figure between (20,000 – 500 =) $19,500 to (20,000 + 500 =) $20,500. If SD increases to $800, the gap of NPW would be much higher, indicating more uncertainty.