1) Including real options in a capital budgeting analysis can raise, but not low
ID: 2799052 • Letter: 1
Question
1) Including real options in a capital budgeting analysis can raise, but not lower, a project's expected NPV as found in a traditional analysis. This is true because, by definition, an option can be exercised or not, and if the option has a negative value, it will be rejected. True or false?
2) A premium on the forward rate is the situation when the spot rate is greater than the forward rate. True or false?
3) Post-audits point out errors in forecasts, and they identify why the errors occurred. This information should help firms obtain better forecasts in the future and improve their capital budgeting process. True or false?
4) Political risk can take on many forms. The important reality for a multinational enterprise is that political risk not only exists but also varies from country to country, and it must be addressed explicitly in any financial analysis. True or false?
5) If the IRS shortened the depreciable lives of the assets, thus increasing their depreciation rates, which of the following statements reflects what would happen to the calculated NPV? a. The calculated NPV would increase. b. The calculated NPV would decrease. c. The calculated NPV would not change.
Explanation / Answer
1) False. By definition, an Option cannot have a negative value. It would be 0 rather.
2) False. A Premium on the forward rate is a situation where Forward rate > Spot Rate
3) True. Identification of errors in forecasts help forecasting in the future.
4) True. Political risk varies from country to country.
5) The answer would be A) NPV would increase
Given that depreciation increases year on year, the cash flow after tax would increase as well in the foremost years with higher Present value Factor. This in turn leads to increase in NPV.
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