Question 1: Why does capital budgeting rely on analysis of cash flows rather than on net income?
Question 2: What does the term 'mutually exclusive investments' mean?
Question 3: If corporate managers are risk-averse, does this mean they will not take risks? Explain.
Question 4: Explain how the concept of risk can be incorporated into the capital budgeting process.
Question 5: If risk is to be analyzed in a qualitative way, place the following investment decisions in order from the lowest risk to the highest risk:
a. New equipment.
b. New market.
c. Repair of old machinery.
d. New product in a foreign market.
e. New product in a related market.
f. Addition to a new product line.