1. To avoid prejudgment of risk during a simulation analysis, the discount rate used to calculate net present value should be the
a. cost of long-term debt.
b. cost of new equity.
c. weighted cost of capital.
d. risk-free rate.
e. required rate of return on projects of similar risk.
2. Forecasting risk is a concern for financial managers because
a. the firm may not be able to correctly project its future financing costs.
b. overly optimistic estimation of future cash flows may lead to incorrect capital budgeting decisions.
c. forecasts by industry analysts may not agree with the firm’s forecasts of its future revenues.
d. strategic options cannot be included in the capital budgeting decision criteria.
e. the investment decision process should aim to match projected cash flows with actual cash flows.
3. Which of the following is not a managerial option in the capital budgeting process?
a. option to abandon
b. option to wait
c. option to expand
d. strategic option
e. none of the above
4. Which of the following break-even analyses yields a negative net present value?
I. accounting break-even
II. cash break-even
III. financial break-even
a. I only
b. II only
c. III only
d. I and II only
e. I, II, and III