SOLVED

21) A company is facing a .45 probability that a competitive product may enter the market at the same time as their own product launch. This would cut their projected demand in half. The company estimates a .35 high market acceptance for that type of product, .45 for medium acceptance. What is the probability of the company’s worst possible outcome? A) 45% B) 20% C) 13% D) 9% E) 5% 22) Norris Gears Inc. owns land with two vacant warehouses which it could sell as is or be rezoned from commercial to light industrial and the buildings upgraded for manufacturing at a cost of $2,450,000 and used for 15 years. There is a 30% chance the rezoning application will be rejected and then Norris will sell the land after one year to make it saleable. If the property is re-zoned Norris estimates a 25% probability that its sales will be $400,000 per year after expenses and before depreciation, a 65% probability that sales will be $300,000 and a 10% that sales will be low at $200,000. If the property is not rezoned and Norris Gears sells the land, there is a 10% probability that the land will be sold this year at $145,000, an 85% probability that the land will go for $115,000 and a 5% probability it goes for $95,000. What is the net present value to Norris of land with warehouses if the company’s hurdle rate is 8%? A) $204,865 B) $157,228 C) $136,955 D) $131,778 E) $97,311 23) Alternative A and Alternative B have the same ENPV. When graphing possible results from the alternative projects, Alternative A has fewer values clustered around the ENPV and has a greater number of lower and higher possible values than Alternative B. What can be concluded when comparing Alternative A to Alternative B? A) A is not as risky as B because its value distribution indicates a higher upside probability. B) A is not as risky as B because its value distribution indicates lower overall variability. C) A is riskier than B because its value distribution indicates a lower overall variability. D) A is not as risky as B because its values are more equally spread over the entire value range. E) A is riskier than b because its value distribution indicates a higher downside probability. 24) In an effort to update its pro forma budget, Morningside Deliveries is attempting to determine the level of service, and therefore income, which will come from a new four-year contract. Morningside assigns a probability of 25% that the customer will require minimum service and provide a NPV of $28,000. The company estimates a 50% probability that medium service will be required and will generate at NPV of $32,000. There is only a likelihood of 25% that the customer will need maximum servicing and produce an NPV of $36,000. What is the standard deviation of the income from the contract? A) $1,280 B) $4,040 C) $5,657 D) $6,428 E) $3,200 25) Etienne Electronics is appraising three projects. Project 1 has a NPV of $64,000 with a 40% probability of occurrence; $78,000 with a 40% probability; and $95,000 with a 20% probability. Project 2 has an NPV of $55,000 and probability of 30%; $105,000 with a probability of 60% and $110,000 with a probability of 10%. Project 3 has an NPV of $75,000 and probability of 20%; $90,000 and probability of 50%, and $105,000 with a probability of occurrence of 30%. Which project should Etienne Electronics undertake? A) Project 1 as it has the highest return with an ENPV of $94.5 million and a similar risk as the other two projects. B) Project 3 as it has the highest return, $91.5 million and lowest risk, a standard deviation of $21.4 million. C) Project 1 as it has the highest return $85.4 and lowest risk, a standard deviation of $24.5 million. D) No decision can be made as Project 3 has the highest return and a higher risk than the other two projects. E) Project 2 as it has the highest return $98 million, and lowest risk, a standard deviation of $45.6 million. 26) The validity of the data on which objective probabilities are based always suffers from the situation that A) The data is historical and may not describe the future B) The expert input being used can be, in reality, wrong C) Opinions can be biased by irrelevant factors D) The data was recorded for other purposes E) The data required is not available 27) If the coefficient of correlation between two projects is 0, it would indicate that A) One project is cyclical and the other is somewhat less so B) Both projects react in a similar manner to a change in interest rates C) The factors that impact one project’s success have no impact on the other project’s success D) The projects are not well diversified E) The revenue from one project will equally offset the losses in the other 28) Which of the following is a type of diversifiable risk? A) Rate of inflation B) General level of interest rates C) Weather D) Exchange rate movements E) Degree of competition 29) Perminder Ltd. buys raw (green) coffee beans, roasts, packages and distributes premium coffee nationally. Green bean prices, like oil, currency and gold, are set on international markets. Which of the following does Perminder Ltd. face? A) Non-diversifiable risk that can be reduced by purchasing long-term future contracts. B) Non-diversifiable risk that can be reduced through changes in processing or investment. C) Diversifiable risk that can be reduced by purchasing green beans from different growers or different countries. D) Diversifiable risk that can be reduced by purchasing long term future contracts. E) Diversifiable risk that can be reduced through changes in processing or investment strategy. 30) Which of the following terms is also used to describe diversifiable risk? A) Avoidable risk. B) Macroeconomic Risk. C) Microeconomic Risk. D) Entrenched Risk. E) Systematic Risk.