Answered: Do we use the term risk to describe an…

Do we use the term risk to describe an investment project where cash flows are not known in advance with certainty? Explain how?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 3QTD

See similar textbooks

Related questions

Q: True or False In the net present value method, market research costs incurred in the past should be…

A: An investment appraisal depicts a financial analysis of a capital project that requires a huge…

Q: How do an investment's required rate of return vary with perceived risk? Explain with an example?

A: Required rate of return refers to the rate which the investors expects from their investments. This…

Q: Describe the procedure of Estimating Risky Cash Flows?

A: Risky cash flow means the future cash flow which falls short of the expectations. This shortage may…

Q: What is the capital asset pricing model (CAPM)? What does it tell us about the required return on a…

A: The required rate of return of a security is the minimum return an investor will demand from the…

Q: how a failed capital project may shape the future strategy of investment capital.

A: Introduction: Capital projects are nothing but a long term capital intensive initiative aimed at…

Q: Which of the following statements is most correct? O (a) When calculating NPV for cash flows of…

A: NPV:- A set of cash flows occurring at different dates is given a net present value (NPV) or net…

Q: Why are discounted cash flow methods of making capital budgeting decisions superior to othermethods?

Q: Which of the following statements is correct? The NPV method assumes that cash flows will be…

A: Solution:- Net Present Value (NPV) means the net of the present value of cash inflows and initial…

Q: What is the maturity period required for an investment to qualify under the definitions of a cash…

A: Cash and cash equivalents correspond to just the line item on the balance sheet that lists the value…

Q: Where does a strong cash forecast begin?

A: What is a Cash flow forecast? A cash flow forecast is an estimation of the amount of cash flow into…

Q: True or False: It is often impossible to forecast the cash flows from follow-on projects associated…

A: TRUE

Q: What does it mean to adopt a maturity matching approach to financing assets, includingcurrent…

A: Maturity matching states that long period funds must be utilized to finance long period assets and…

Q: We discussed the use of sensitivity analysis and simulation analysis in the context of estimating…

A: Cash flow can be inwards or outwards. Cash flow includes the fallow of cash only, it does not…

Q: What does it mean to adopt a maturity matching approach to financing assets, including current…

A: Matching concept while preparing the income statement , revenue and profits are matched with…

Q: What does the term “risk” mean in the context of capital budgeting; to what extent can risk be…

A: Capital budgeting is a process whereby a firm or an investor evaluates all the long-term…

Q: How much is the expected cash flow disregarding other simulations?

A: Capital budgeting is a method used for finding the profitability of investment proposals. It…

Q: Which of the following statements are true regarding the payback period of an investment? It does…

A: Answer: The correct option is (4) All of the above.

Q: Why is it true that a reinvestment rate is implicitly assumed whenever we find thepresent value of a…

A: Discounting is the method of assessing the real value of a potential transaction or collection of…

Q: How do you evaluate an asset whose value is dependent on future cash flow expectations

A: The Answer :

Q: Risk in capital budgeting implies that the decision maker knows _ of the cash flows. Fill in the…

A: In capital budgeting the decision maker will have an idea after analysing risks about the cash flows…

Q: What role do incremental cash flows play in a replacement analysis?

A: Answer: Introduction: Replacement analysis is one of the key analyses in the concept of capital…

Q: How can we estimate Risky Cash Flow?

A: Companies always predict the cash flows related with the project because it helps to company to…

Q: How are incremental cash flows found in a replacement analysis?

A: The choice to substitute an existing asset with another is defined as the net current and internal…

Q: (c) Why is net present value considered to be a superior method of evaluating the cash flows from a…

A: The concepts of capital budgeting tools can be used here to answer the questions. There are…

Q: When is the financial risk by far the most critical element to consider?

A: Introduction: Risk can be characterized in terms of the uncertainty of future consequences resulting…

Q: Describe the process of estimating Risky Cash Flows?

A: Process of estimating Risky Cash flows.

Q: What is the risk in the context of financial decision making and performance?

A: Financial decision making: Financial decision making denotes to decision making concerning financial…

Q: Could you explain the term "financial risk" in simple terms

A: Financial risk - The risk of losing money on an investment.

Q: discuss the importance of considering risk when analyzing investments?

A: Risk refers to the probability of uncertainties about future .Risk may also be termed as volatility…

Q: Explain the Hedging against cash flow risk.

A: Hedging is a strategy by which a financial instrument is used to minimize the risk created by the…

Q: why is knowledge of the money market important for carrying out value maximizing working capital…

A: Introduction: For this question, the importance of working capital which helps to manage the short…

Q: Explain how sunk costs and cannibalisation affect the determination of an investment’s incremental…

A: Introduction : . Simply put, sunk costs refers to the costs that has already been incurred and the…

Q: ? Assume that all projects being considered have normal cash flows and are equally risky. oll…

A: It refers to the rate of return that is computed by the company to make a decision of selection of a…

Q: Can the firm withdraw funds from the investment pool for other investment purposes?

A: Yes, a firm can initiate the withdrawal of the amount invested from the investment pool in which…

Q: You are a risk-averse investor. Would you therefore invest in financial assets that have a high or a…

A: The risk-averse investors are those investors who prefer the lower return with lower risk instead of…

Q: How does risk management affect a company’s ability to finance its projects?

A: Risk is associated with every business; there are some risks which are controllable by the…

Q: Technically, the required return of an investment can be determined by determining the investments…

A: The required return on an investment is the return that is expected and assumed by an investor to be…

Question

Do we use the term risk to describe an investment project where cash flows are not known in advance with certainty? Explain how?

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Similar questions

How can we estimate Risky Cash Flow?
How do unequal cash flows affect the future value of an investment?
Which is least likely correct about security valuation?a. The calculated or determined value considers the stream of future cash flows.b. The calculated or determined value equals the market price.c. The calculated or determined value considers the risks involved and the opportunity cost.d. The calculated or determined value allows the investors to evaluate whether a security isovervalued or undervalued.e. All of the above
Describe the process of estimating Risky Cash Flows?
Which of the following is not a reason for risk and uncertainty in capital budgeting? a. Decisions are based on expected cash flows b. All decisions are based on forecasts c. Decisions are based on past cash flows d. All forecasts are subject to uncertainty Clear my choice
Which of the following methods for evaluating capital investment proposals reduces the expected future net cash flows originating from the proposals to their present values and computes a net present value? a. average rate of return b. net present value c. internal rate of return d. cash payback
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?
True or false? One way to address risk for a capital budgeting problem is to conduct scenario analysis
Forecasting risk can be defined as the possibility that _____ will lead to incorrect decisions. a. the inclusion of opportunity costs b. erosion c. errors in projected cash flows d. the exclusion of sunk costs e. net working capital costs
An analysis of a proposal by the net present value method indicates that the present value of future cash inflows is less than the amount to be invested Which of the following statements best describes the results of this analysis ? The proposal is undesirable , and the rate of return expected from the proposal is less than the minimum rate used for the analysis . The proposal is desirable , and the rate of return expected from the proposal is less than the minimum rate used for the analysis The proposal is desirable , and the rate of return expected from the proposal exceeds the minimum rate used for the analysis . The proposal is undesirable , and the rate of return expected from the proposal exceeds the minimum rate used for the analysis .
Risk in capital budgeting implies that the decision maker knows _ of the cash flows. Fill in the blanks with correct option. A. Variability B. Certainity C. Probability D. None of these
Risk in capital budgeting implies that the decision maker knows _ of the cash flows. A. Variability B. Certainity C. Probability D. None of these