1. Which of the following statements about the qualitative approach to project r
ID: 2733510 • Letter: 1
Question
1. Which of the following statements about the qualitative approach to project risk assessment is most correct?
A. Typically, “yes” answers are assigned one point and “no” answers zero points.
B. All of the above statements are correct.
C. Typically, qualitative risk assessment is used in conjunction with a quantitative risk assessment (as opposed to in place of a quantitative risk assessment).
D. The higher the score, the greater the risk.
E. Qualitative risk assessment involves the answers to a series of yes/no questions.
2. The nature of a project’s component cash flow distributions and their correlation with one another determine a project’s?
A. None of the above answers is correct.
B. market risk.
C. Answers (a), (b), and (c) are correct.
D. stand-alone risk.
E. corporate risk.
3. Which of the following statements about capital budgeting risk analysis techniques is false?
A. Payback period provides a rough measure of a project’s liquidity.
B. Payback period provides a rough measure of a project’s risk.
C. Scenario analysis can provide a quantitative measure of a project’s risk.
D. Scenario analysis usually is based on four scenarios.
E. Scenario analysis gives managers an idea of the worst possible outcome.
4. Chronic Pain Clinic has estimated the following cash flows associated with a new project. The project cost of capital (discount rate) is 10 percent.
A. Year 0: ($800,000)
B. Year 1: $400,000
C. Year 2: $400,000
D. Year 3: $400,000
5. What is the project’s net present value?
A. $126,897
B. $246,992
C. $224,538
D. $207,223
E. $194,741
6. A clinic’s management has estimated the net present value (NPV) for a proposed project at $15,000. All else held constant, which of the following would increase the project’s estimated NPV?
A. An increase in the project’s risk
B. An increase in the corporate cost of capital
C. An increase in the initial investment cost
D. None of the above answers is correct
E. A two-year delay in the receipt of the project’s initial net operating cash flows (assuming the expected cash flows are positive)
Explanation / Answer
(‘1) Option no B is correct ( All the above statements are correct)
(‘2) Corporate Risk- Corporate risk reflects the earning stability of firm. It depends on Project’s and its correlation with returns of other assets of firm.
Based on the above the answer is E (- Corporate Risk)
(‘3) Payback period is used where investor want to get an idea about liquidity of projects. Hence it is used to check the liquidity of project roughly because it ignores the time value of money.
Scenario analysis is usually based on three scenarios namely Worst Case, Most Likely Case and Best Case. It provides the information about worst possible case. It also presents quantitative measure of stand – alone risk but ignores the corporate risk and market risk.
Based on above A and E are the correct answers.
(‘5) Cash Outflow= $ 800,000
Annual Cash Inflow= $ 400,000
Discounting Factor for 3 Years at 10 % = 2.4868
NPV = Present Value of Cash Inflow- Cash Outflow
NPV= (400,000 x 2.4868 )-800,000
NPV = $ 194,741 ( Answer – E )
(‘6) Increase in cost of Capital will decrease the NPV.
Increase in Initial investment will also reduce the NPV.
Delay in cash inflow will also reduce the NPV.
Based on above the Answer D is Correct (None of the above)
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