If a firm cannot measure a potential project’s risk with precision, should it abandonthe project? Explain your answer.

Q: Is the net-investment test the only way to accurately predict projectborrowing?

A: Net investment refers to the total amount of money that a company invests in capital assets which is…

Q: What does it mean to “manage” risk? Should itsstockholders want a firm to “manage” all of therisks…

A: Company is not certain about few things which cannot be predicted exactly. In that case, there will…

Q: Describe how underinvestment and asset substitution can destroy firm value and how risk management…

A: Underinvestment and asset replacement can have a negative impact on a company's value, however risk…

Q: What are the sources of risk associated with project development?

A: Variations in returns of an investment from its expected returns are called risk. The risk of an…

Q: Which of the following contributes positively to the value of a real option to delay investment?…

A: Real option:A real option is a selection made open to a firm's managers on prospects for business…

Q: Is a method of screening out in certain situations an unacceptable investment alternative?

A: Capital budgeting is the technique that is used in business to determine the best investment…

Q: How do simulation analysis and scenario analysis differ in the way theytreat very bad and very good…

A: The process to evaluate different probable events and their outcomes that is end result of a project…

Q: f a project is more risky than the firm, and you use the WACC of the form to evaluate the project.…

A: Required rate is the expected rate of return of the project and that depends on the risk of the…

Q: Can the risk premium be negative after an investment is undertaken or before?

A: The risk premium is the extra risk-free return to require the risk of project acknowledgment. This…

Q: what does it mean if the npv and irr are both negative quora, should the company invest in the…

A: Capital Budgeting entails long-term planning and monitoring of capital expenditures, as well as a…

Q: Why is the additional risk not taken without expected additional return?

A: The risk-return tradeoff takes note of that the potential return increments with an expansion in…

Q: minimize overall risk

A: A manager has to make different decisions related to choosing a project.  A project giving a higher…

Q: How can break-even analysis be helpful in evaluating project risk

A: Break even analysis helps us in determining that level of sales at which the company is at a point…

Q: How do companies manage risk? What are the factors that contribute to a high-risk project?

A: In business there must be ups and downs in their business surroundings.  In every business there…

Q: Would you expect an abandonment option to increase or decrease a project’sexpected NPV and risk (as…

A: Net present value (NPV) is the contrast between the present value of money inflows over some…

Q: Should a firm insure itself against all insurable risks that it faces? Explain.

A: Solution:- An Insurable risk is a risk which fulfills the criteria for insurance.For a risk to be…

Q: What should a company do when the cost of eliminating the conditions that create an IT risk exceeds…

A: Risk management is the process of identifying, assessing, and prioritizing risks, followed by the…

Q: If a firm fails to consider growth options, would this cause it to underestimate oroverestimate…

A: Growth options will lead to an increase in the future cash flows which further increases the growth…

Q: How should firms evaluate projects with different risks?

A: Project evaluation is carried out by organization to know if a particular project is suitable for…

Q: Discuss the following statement: “A project may not be very riskyin spite of its high sensitivity to…

A: Sensitivity analysis is defined as the percentage change in one variable with respect to percentage…

Q: What does a project’s stand-alone risk reflect?

A: Stand alone risks are risks that are associated with a particular asset or a project. Companies when…

Q: Explain if the operational risk is considered a risk or uncertainty? Why? If it is a risk, how can…

A: Operational Loss:   The risk involved in failures of Man, Machine, Material, and Methods during…

Q: What is the process of economically evaluating a project's desirability?

A: Project desirability is the desirability that differentiates the project from other ordinary…

Q: Which of the following is also known as what if analysis? a. None of the options b. Sensitivity…

A: sensitive analysis is a tool for determining effects on outcomes in a mathematical model by changing…

Q: How important are assumptions in preparing a business project feasibility? Justify your answer. What…

A: A development plan, sometimes referred as a feasible analysis or sustainability report, is a method…

Q: When can a project may fail the net-investment test?

A: Yes, a firm can initiate the withdrawal of the amount invested from the investment pool in which…

Q: What is hedging and how is it different from diversification? If a firm needs to manage its risk,…

A: A hedge is an investment that is made fully intent on diminishing the danger of unfriendly value…

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.