Capital Budgeting Paper 23

1

Philip Enterprises, distributor of compact disks (CDs) is developing its budgeted cost of goods sold for 2013. Philip has developed the following range of sales estimates and associated probabilities for the year.
Sales Estimate Probability
$ 60,000 25%
85,000 40%
100,000 35%
Philip’s cost of goods sold averages 80% of sales. What is the expected value of Philip’s 2013 budgeted cost of goods sold?






2

Which of the following capital budgeting techniques would allow management to justify investing in a project that could not be justified currently by using techniques that focus on expected cash flows?






3

Assume that Reston Corp. is considering investing in a project. To evaluate the project, management has developed the following cash flow projections and related probabilities.
Present value of future cash flows Probability of occurrence
$200,000 .4
$500,000 .3
$800,000 .3
What is the expected return for the project?






4

Assume that Reston Corp. is considering investing in a project. To evaluate the project, management has developed the following cash flow projections and related probabilities.
Present value of future cash flows Probability of occurrence
$200,000 .4
$500,000 .3
$800,000 .3
Assume that the standard deviation of the returns for the project is $150,000. What is the coefficient of variation for the project?






5

Which of the following techniques recognizes that management often faces a series of decisions that may affect the value of an investment?






6

Which of the following techniques recognizes that management often faces a series of decisions that may affect the value of an investment?






7

Which of the following is not a technique for considering the risk of an investment?






8

The level of risk that concerns investors who supply capital to a diversified company is






9

A company uses portfolio theory to develop its investment portfolio. If the company wishes to obtain optimal risk reduction through the portfolio effect, it should make its next investment in






10

A company uses portfolio theory to develop its investment portfolio. If the company wishes to obtain optimal risk reduction through the portfolio effect, it should make its next investment in






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