rojects differ in risk, and risk analysis is a critical component of the capital budgeting process.Consider the case of United Recycling Inc.:United Recycling Inc. is one of the largest recyclers of glass and paper products in the United States. The company is looking into expanding into the cardboard recycling business. The company’s CFO has performed a detailed analysis of the proposed expansion.The company’s CFO hired a third-party consulting firm to estimate the cost per ton of processing the cardboard. The consulting firm’s cost estimate for processing the cardboard was significantly higher than what the CFO had been using in his financial model. Based on the information given, determine which of the statements is correct.When the CFO adjusts the cost per ton of processing the cardboard, the project’s NPV will decrease. When the CFO adjusts the cost per ton of processing the cardboard, the project’s NPV will increase.  Evaluating risk is an important part of the capital budgeting process. Which of the following is measured by the variability of the project’s expected returns?Corporate, or within-firm, risk Market, or beta, risk Stand-alone risk  When dealing with    , diversification is totally ignored.

Question
Asked Feb 7, 2020
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rojects differ in risk, and risk analysis is a critical component of the capital budgeting process.
Consider the case of United Recycling Inc.:
United Recycling Inc. is one of the largest recyclers of glass and paper products in the United States. The company is looking into expanding into the cardboard recycling business. The company’s CFO has performed a detailed analysis of the proposed expansion.
The company’s CFO hired a third-party consulting firm to estimate the cost per ton of processing the cardboard. The consulting firm’s cost estimate for processing the cardboard was significantly higher than what the CFO had been using in his financial model.
 
Based on the information given, determine which of the statements is correct.
When the CFO adjusts the cost per ton of processing the cardboard, the project’s NPV will decrease.
 
When the CFO adjusts the cost per ton of processing the cardboard, the project’s NPV will increase.
 
 
Evaluating risk is an important part of the capital budgeting process. Which of the following is measured by the variability of the project’s expected returns?
Corporate, or within-firm, risk
 
Market, or beta, risk
 
Stand-alone risk
 
 
When dealing with    , diversification is totally ignored.
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Expert Answer

Step 1

a) When the CFO adjusts the cost per ton of processing the cardboard, the project’s NPV will decrease.

This is because, when the cost per ton of processing the cardboard increases, the cash outflow will increase. Thus, the Net Present value which is the sum of the present value of cash inflows and outflows will decrease.

Step 2

b) Standalone risk.

When evaluating a project’s expected return, its variability will be measured by the stand-alone risk. Since, the risk is associate...

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