Multiple Choice
Identify the letter of the choice that best
completes the statement or answers the question.
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1.
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Lucky
Oil Drillers are evaluating whether or not they should drill for oil. They are concerned that
the hole will be dry and the cost of the drilling will not be recaptured. What type of risk is
this and which technique would be most suitable to evaluate this project? a. | Systematic risk and NPV with payback
approach | b. | Systematic risk
and simulation analysis | c. | Project risk and NPV with payback
approach | d. | Project risk and
simulation analysis | | |
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2.
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Lucky
Oil Drillers decided to proceed with the oil drilling project and were successful. The company
is now considering selling the well. The price of oil is currently at $20, which is below the
average price of the past two years, but higher than the average price for the past five years.
What is the best evaluation technique for establishing a value on the well? a. | Risk Adjusted Discount Rate | b. | Payback | c. | Sensitivity Analysis | d. | Certainty Equivalent Approach | | |
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3.
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XYZ
Company’s beta has been unleveraged so that: a. | The beta value for only the business risk can be
obtained | b. | The beta value for
only the financial risk can be obtained | c. | The proper discount rate is applied to XYZ Company’s
projects | d. | The correct beta
value is used when calculating WACC | | |
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4.
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Using
risk evaluation techniques to calculate the expected performance of a project has many drawbacks
EXCEPT: a. | The discount rate
can be subjective | b. | Project risk is taken into consideration rather than using
a standard discount rate | c. | Probabilities of cash flows are
subjective | d. | Difficulty in
establishing accept/reject values | | |
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5.
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An
analyst for Global Resorts has completed a valuation for a project to build a luxury hotel in
Lithuania. Using a risk-adjusted discount rate approach, her calculations indicate an NPV of
-$1.85 MM. What variables would need to change to achieve a positive NPV? a. | Increase to net investment | b. | Decrease in cash inflows | c. | Decrease to positive cash flow
probabilities | d. | Decrease in risk
premium | | |
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