# Accounting Risk in Capital Budgeting

1. Which of the following is NOT an acceptable method of accounting for risk in capital budgeting?
A) Certainty equivalent approach
B) Beta distribution analysis
C) Probability trees
D) Scenario analysis

2. Famous Danish Corp. is replacing an old cookie cutter with a new one. The cookie cutter is being sold for \$25,000 and it has a net book value of \$75,000. Assume that Famous Danish is in the 34% income tax bracket. How much will Famous Danish net from the sale?
A) \$61,000 B) \$55,000 C) \$75,000 D) \$42,000
3. When selecting the best project from a group of mutually exclusive projects, you should choose the project with the highest:
A) net present value.
B) internal rate of return.
C) accounting rate of return.
D) payback.

4. The financial manager selecting one of two projects of differing risk should select the project with the:
A) largest risk-adjusted net present value.
B) least relative risk.
C) greatest return even if that project has greater risk.
D) least risk even though that project has less return.

5. All of the following variables are used in the calculation of the certainty equivalent approach EXCEPT:
A) number of possible outcomes.
B) project's expected life.
C) risk-free interest rate.
D) initial cash outlay.

6. What method is used for calculation of the accounting beta?
A) Simulation
B) Regression analysis
C) Sensitivity analysis
D) Correlation trees

7. A firm purchases an asset with a five year life for \$90,000, and it costs \$10,000 for shipping and installation. According to the current tax laws the cost basis of the asset is:
A) \$100,000. B) \$95,000. C) \$80,000. D) \$70,000.
8. Which of the following is considered the major risk when analyzing projects in a multinational environment?
A) Inflation
B) Political risk
C) Currency fluctuation
D) Lack of available betas

#### Solution Preview

...(As there is a loss)
=25000+ (75000-25000)*34%
=\$42000
Hence option D)

3. When selecting the best project from a group of mutually exclusive projects, you should choose the project with the highest:
A) net present value.
B) internal rate of return.
C) accounting rate of return.
D) payback.
A) net present value.

4. The financial manager selecting one of two projects of differing risk should select the project with the:
A) largest risk-adjusted net present value.
B) least relative risk.
C) greatest return even if that project has greater risk.
D) least risk even though ...