1. How does the basic net present value model of capital budgeting deal with the problem of project risk? What are the shortcomings of this approach?
2. How would you define risk as it is used in a capital budgeting analysis context?
3. Recalling the discussion in Chapter 8, when is the standard deviation of a project's cash flows an appropriate measure of project risk? When is the coefficient of variation an appropriate measure?
4. How does the basic net present value capital budgeting model deal with the phenomenon of increasing risk of project cash flows over time?
5. When should a firm consider the portfolio effects of a new project?
6. What are the primary advantages and disadvantages of applying simulation to capital budgeting risk analysis?
7. Computer simulation is used to generate a large number of possible outcomes for an investment project. Most firms invest in a particular project only once, however. How can a computer simulation model be helpful to the typical decision maker who is making a one-time-only investment decision?