1. What does the term risk mean in the context of capital budgeting: to what extent can risk be quantified; and when risk is quantified, is the quantification based primarily on statistical analysis of historical data or on subjective, judgmental estimates.
2. Eli Lilly is very excited because sales for his nursery and plant company are expected to double from $690,000 to $1,380,000 next year. Eli notes that net assets (Assets − Liabilities) will remain at 30 percent of sales. His firm will enjoy an 11 percent return on total sales. He will start the year with $290,000 in the bank and is bragging about the Jaguar and luxury townhouse he will buy.
a. Compute his likely cash balance or deficit for the end of the year. Start with beginning cash and subtract the asset buildup (equal to 30 percent of the sales increase) and add in profit.
b. Does his optimistic outlook for his cash position appear to be correct.