Answer Happy

Projects 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.
Part 1. 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 increase.
When the CFO adjusts the cost per ton of processing the
cardboard, the project’s NPV will decrease.
Part 2. Evaluating risk is an important part of
the capital budgeting process. Which of the following represents
the project’s risk to the corporation as opposed to investors’
risks?
-Market, or beta, risk
-Stand-alone risk
-Corporate, or within-firm, risk
The problem with using (a risk adjusted required rate of
return / stand-alone risk / market risk / corporate, or
within-firm, risk) when trying to adjust for projects that
are more risky or less risky than a firm’s average project is that
these adjustments are extremely subjective and difficult to
justify. Possible answers are bold.