07 May Capital Budgeting Questions Main
Question 1
Describe the capital asset pricing model (CAPM) and how it is used in capital budgeting decisions.
Your response should be at least 200 words in length.
Question 2
You win the $20 million state lottery, and you have a choice of taking an amount of money per year for the next 20 years or a flat payment now. The flat payment that the state offers you is $9.82 million.
What discount rate is the state using?
Should you take the money or the annuity?
Your response should be at least 200 words in length.
Question 3
In terms of capital budgeting, explain the difference between risk and uncertainty.
Your response should be at least 200 words in length.
Question 4
What additional complexities arise when multinational corporations consider capital projects on a global basis?
Your response should be at least 200 words in length.
Question 5
Project C has an expected value of $500 and a standard deviation of $50. Project D has an expected value of $300 and a standard deviation of $10. Comment on the desirability of these projects.
Your response should be at least 200 words in length.
Question 6
The Petram Company has estimated expected cash flows for 1996 to be as follows:
Probability Cash flow
.10 $120,000
.15 $140,000
.50 $150,000
.15 $180,000
.10 $210,000
Calculate the following:
expected value
standard deviation
coefficient of variation
the probability that the cash flow will be less than $100,000
Your response should be at least 75 words in length.
Question 7
The Widget Company has estimated the following revenue possibilities for the year:
Sales Probability
100 0.15
150 0.20
220 0.30
290 0.20
310 0.15
Find the expected revenue.
Find the standard deviation.
Find the coefficient of variation
Your response should be at least 75 words in length.
Question 8
1. A two-period project has the following probabilities and cash flows:
Probability Cash Flow
Period 1: .25 500
.50 600
.25 700
Period 2: .30 300
.50 500
.20 700
2. The discount rate is seven percent, and the initial investment is $1,000. How much is the expected NPV of this project?
Your response should be at least 75 words in length.
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