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Multiple choice questions

Try the multiple choice questions below to test your knowledge of Chapter 14. Once you have completed the test, click on 'Submit Answers for Grading' to get your results.

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This activity contains 20 questions.

Question 1.

A __________ approach to examining project risk occurs when the manager applies a probability distribution to factors such as market size, selling price, fixed and variable costs, and the useful life of the project. The manager then runs a computer program to determine the project worth by randomly selecting values for each variable, within the limits assigned. This is done numerous times to generate a complete risk-return analysis.

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Question 2.
The coefficient of variation of net present value measures the __________.


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Question 3.

A __________ approach to examining project risk occurs when cash flows are arranged such that a cash flow in one period leads to several possible cash flow outcomes in the subsequent period. Each individual cash flow in the subsequent period then leads to several possible cash flow outcomes in its subsequent period. This process continues numerous times to generate a complete risk-return graphic.

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Question 4.
The probability in subsequent periods that is conditioned on what has occurred earlier is referred to as the __________.


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Question 5.

What is the expected value of NPV (to the nearest dollar) for the following situation? The firm expects an NPV of $10,000 if the economy is exceptionally strong (40% probability), an NPV of $4,000 if the economy is normal (40% probability), and an NPV of -$2,000 if the economy is exceptionally weak (20% probability).

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Question 6.
You are considering two investment proposals, project A and project B. B's expected net present value is $1,000 greater than that for A and A's dispersion of net present value is less than that for B. On the basis of risk and return, you would say that __________.


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Question 7.
A firm that ignores risk differences (does not adjust for risk) when choosing new investment projects will generally __________.


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Question 8.
If two projects are completely and positively linearly dependent (or positively related), the measure of correlation between them is __________.


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Question 9.
Assume that the probability distribution of NPVs is normal. The firm considers true risk occurring if the project results in a NPV that is zero or less. If the expected NPV is $1,000 and the standard deviation of NPV is $500, what is the probability that the project has a NPV of 0 or less?


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Question 10.

Recently, you noticed that a major stock exchange index was up 85% for the previous year. After some investigation, you have determined that the expected appreciation is 16% and the standard deviation of appreciation is 30% on the exchange. Which of the following statements is most correct regarding this occurring?

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Question 11.
The probability associated with the first portion of a complete branch of the probability tree is referred to as the __________.


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Question 12.

The firm is expanding its production facility by adding an additional machine to its current production line of one machine to produce more Winging Widgets. The profit generated from this machine will most likely (given only the four possibilities below to choose from) have a correlation of __________ when compared the profit from the current machine?

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Question 13.
Managerial (real) options __________.


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Question 14.
Which of the following is not an example of a managerial option?


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Question 15.

A project costs $10 million today. Next year (year 1) the cash inflow will be either $10 million or $2 million with equal probability. If the year-1 cash inflow was $10 million, then the year-2 cash flow will also be $10 million. If the year-1 cash inflow was $2 million, then the year-2 cash flow will also be $2 million. If the firm can abandon the project ONLY after year 1 for a known amount of $3 million at that time, what is the abandonment value if the appropriate discount rate is 5%?

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Question 16.

Project 1, that the firm is already doing, currently has an expected NPV of $120,000 and a standard deviation of $200,000. Project 2, that the firm is going to undertake, has an expected NPV of $100,000 and a standard deviation of $150,000. The correlation between these two projects is 0.80. What is the coefficient of variation for the portfolio of projects?

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Question 17.
The probability that a particular sequence of cash flows might occur is referred to as the __________.


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Question 18.
What technique is best used when cash flows are related to cash flows in previous periods?


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Question 19.
When evaluating the risk and return of a project using the probability tree approach, what is the appropriate rate to discount each sequence of cash flows in the tree?


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Question 20.

What is the standard deviation of NPV (to the nearest dollar) for the following situation? The firm expects a NPV of $10,000 if the economy is exceptionally strong (40% probability), a NPV of $4,000 if the economy is normal (40% probability), and a NPV of -$2,000 if the economy is exceptionally weak (20% probability).

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