Capital Budgeting Paper 17


Mega, Inc., a large conglomerate with operating divisions in many industries, uses risk-adjusted discount rates in evaluating capital investment decisions. Consider the following statements concerning Mega’s use of risk-adjusted discount rates.
I. Mega may accept some investments with internal rates of return less than Mega’s overall average cost of capital.
II. Discount rates vary depending on the type of investment.
III. Mega may reject some investments with internal rates of return greater than the cost of capital.
IV. Discount rates may vary depending on the division.
Which of the above statements are correct?


Sensitivity analysis, if used with capital projects,


The proper discount rate to use in calculating certainty equivalent net present value is the


When the risks of the individual components of a project’s cash flows are different an acceptable procedure to evaluate these cash flows is to


A manager wants to know the effect of a possible change in cash flows on the net present value of a project. The technique used for this purpose is


A widely used approach that is used to recognize uncertainty about individual economic variables while obtaining an immediate financial estimate of the consequences of possible prediction errors is


Sensitivity analysis is used in capital budgeting to


When determining net present value in an inflationary environment, adjustments should be made to


When evaluating a capital budgeting project a company’s treasurer wants to know how changes in operating income and the number of years in the project’s useful life will affect its breakeven internal rate of return. The treasurer is most likely to use


Which of the following is not an example of a real option in a capital budgeting decision?


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