8. Consider the quantitative version of the risk formulaA. What quantity (dollar value) of risk is generated by a threat that will cause $5,000,000 indamage if it occurs, and has a 0.1% chance of occurring in any given year?B. Based on the quantitative risk calculated in part A, is it worth deploying a control that costs$50,000 per year (easily possible if it requires hiring a dedicated employee)?C. Consider the case that $5,000,000 in damages is likely to greatly exceed both the totalrevenue and the emergency cash reserve of a small business (which typically recommendedto be in the ballpark of 6 months of operating expenses). How would you rate this threat forsuch a company, qualitatively?D. Based on the qualitative risk assessed in part C, is it worth deploying a control that costs$50,000 per year? Why or why not?

Annualized loss expected= Annualized rate of occurrence * Loss exposure…

8. Consider the quantitative version of the risk formula A. What quantity (dollar value) of risk is generated by a threat that will cause $5,000,000 in damage if it occurs, and has a 0.1% chance of occurring in any given year? B. Based on the quantitative risk calculated in part A, is it worth deploying a control that costs $50,000 per year (easily possible if it requires hiring a dedicated employee)?

8. Consider the quantitative version of the risk formula A. What quantity (dollar value) of risk is generated by a threat that will cause $5,000,000 in damage if it occurs, and has a 0.1% chance of occurring in any given year? B. Based on the quantitative risk calculated in part A, is it worth deploying a control that costs $50,000 per year (easily possible if it requires hiring a dedicated employee)?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 23P

See similar textbooks

Similar questions

Scenario Analysis Shao Industries is considering a proposed project for its capital budget. The company estimates the projects NPV is 12 million. This estimate assumes that the economy and market conditions will be average over the next few years. The companys CFO, however, forecasts there is only a 50% chance that the economy will be average. Recognizing this uncertainty, she has also performed the following scenario analysis: What are the projects expected NPV, standard deviation, and coefficient of variation?
You estimate that a planned project for your company has a 0.3 chance of tripling the investment in a year and a 0.7 chance of halving the investment in a year. What is the standard deviation of the return on this project? A.1.5625 B.1.3126 C.1.2247 D.1.1457
1. A company is considering investing in a project. The future perpetual cash flow is either $750K if the market goes up or $125K if the market goes down next year. The objective probability the market will go up is 20%. The appropriate risk-adjusted rate of return (cost of capital) is 25%. The initial capital investment required at time 0 is $1200K. а. Should the company invest in this project? b. Upon closer inspection the CFO realizes the company actually has some flexibility in managing this project. Specifically, if the market goes down, the company can abandon the project, and liquidate its original capital investment for 75% of its original value. If, however, the market should go up, the company could expand operations, which would result in twice the original PV of the cash flows. To expand the company will have to make an additional capital expenditure of $800K. The CFO wants to know if the company should now proceed with the project with the added flexibilities, and asks…
Aliska plc is investing £990,000 in a project. If it is a success then the return will be £230,000. However, if a particular risk occurs the return will reduce to £10,000. The probability of this risk occurring is 02 What is the project's expected return on the investment for risk evaluation purposes? A. 4.85% B. 5.45% C. 18.79% D. 19.39%
Celestial Crane Cosmetics is analyzing a project that requires an initial investment of $3,225,000. The project's expected cash flows are: Year Cash Flow Year 1 $375,000 Year 2 -125,000 Year 3 500,000 Year 4 400,000 If the company's WACC is 8% and the project has the same risk as the firm's average project, what is the project's modified internal rate of return (MIRR)? Should you accept or reject this project?
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 11 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3 and 3.5 years, respectively. Time: 0 1 2 3 4 5 Cash flow: -$280,000 $ 56,800 $75,000 $123,000 $113,000 $72,200 Use the MIRR decision rule to evaluate this project. (Do not round intermediate calculations and round your final answer to 2 decimal places.
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 12 percent, and that the maximum allowable payback and discounted payback statistics for your company are 2.5 and 3.0 years, respectively. Time: 0 1 2 3 4 5 Cash flow: −$364,000 $65,300 $83,500 $140,500 $121,500 $80,700 Use the IRR decision rule to evaluate this project. (Do not round intermediate calculations and round your final answer to 2 decimal places.) Should it be accepted or rejected?multiple choice accepted rejected
Fountain Corporation’s economists estimate that a good business environment and a bad business environment are equally likely for the coming year. The managers of the company must choose between two mutually exclusive projects. Assume that the project the company chooses will be the firm’s only activity and that the firm will close one year from today. The company is obligated to make a $4,100 payment to bondholders at the end of the year. The projects have the same systematic risk but different volatilities. Consider the following information pertaining to the two projects: Economy Probability Low-Volatility Project Payoff High-Volatility Project Payoff Bad .50 $ 4,100 $ 3,500 Good .50 4,600 5,200 a. What is the expected value of the company if the low-volatility project is undertaken? The high-volatility project? (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) b. What is the expected value of the…
Fountain Corporation’s economists estimate that a good business environment and a bad business environment are equally likely for the coming year. The managers of the company must choose between two mutually exclusive projects. Assume that the project the company chooses will be the firm’s only activity and that the firm will close one year from today. The company is obligated to make a $4,200 payment to bondholders at the end of the year. The projects have the same systematic risk but different volatilities. Consider the following information pertaining to the two projects: Economy Probability Low-Volatility Project Payoff High-Volatility Project Payoff Bad .50 $ 4,200 $ 3,400 Good .50 4,600 4,900 a. What is the expected value of the company if the low-volatility project is undertaken? What if the high-volatility project is undertaken? (Do not round intermediate calculations.) b. What is the expected value of the company’s equity if the low-volatility…
1. Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 13 percent, and that the maximum allowable payback and discounted payback statistics for your company are 2.5 and 3.0 years, respectively. Time: 0 1 2 3 4 5 Cash flow: −$345,000 $64,900 $83,100 $140,100 $121,100 $80,300 Use the IRR decision rule to evaluate this project. (Do not round intermediate calculations and round your final answer to 2 decimal places.) ______ 2 Compute the IRR statistic for Project E. The appropriate cost of capital is 9 percent. (Do not round intermediate calculations and round your final answer to 2 decimal places.) Project E Time: 0 1 2 3 4 5 Cash flow −$3,500 $1,150 $1,080 $920 $700 $500 IRR%: ___ 3. Compute the NPV for Project M if the appropriate cost of capital is 7 percent. (Negative amount should be indicated by a minus sign. Do not round…
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 13 percent, and that the maximum allowable payback and discounted payback statistics for your company are 2.5 and 3.0 years, respectively. Time: 0 1 2 3 4 5 Cash flow: −$ 225,000 $ 64,800 $ 83,000 $ 140,000 $ 121,000 $ 80,200 Use the IRR decision rule to evaluate this project. Note: Do not round intermediate calculations and round your final answer to 2 decimal places.
The managers of a company are considering an investment with the following estimated cash flows. MARR is 15% per year. The company is inclined to make the investment; however, the managers are nervous because all of the cash flows and the useful life are approximate values. The capital investment is known to be within ±5%. Annual expenses are known to be within ±10%. The annual revenue, market value, and useful life estimates are known to be within ±20%. Solve, a. Analyze the sensitivity of PW to changes in each estimate individually.Based on your results,make a recommendation regarding whether or not they should proceed with this project. Graph your results for presentation to management.b.The company can perform market research and/or collect more data to improve the accuracy of these estimates. Rank these variables by ordering them in accordance with the need for more accurate estimates (from highest need to lowest need).