Question

24. A company estimates an NPV of a project under three different set of assumptions (Bear, Base, Bull) to Fotoaluate forecasting risk; management agrees to undertake the project if the weighted average NPV for Font Size the three different scenarios (Bear, Base, Bull) is positive. Based on the scenario analysis performed, the company will pursue the project. Evaluate the underlined words in italics. True or False? Scenerio Bear Base Bull $ $ $ NPV Probability (100) 30.00% 35 50.00% 65 20.00% a. True b. False 25. Assume management has found profitable investment opportunities, but lacks the funds to undertake one or more of these opportunities. This situation is most closely related to the concept of: a. Managerial options b. Sensitivity analysis c. Forecasting risk d. Capital rationing e. Opportunity costs

Answer 1

24)

Weighted average NPV of the project = -100* 30% + 35 * 50% + 65* 20% = 0.5

As weighted average NPV> 0, the company will pursue the project.

Answer is a) True

25)

When the management has profitable opportunities and lacks the funds to undertake the opportunities, it is most likely to result in the concept of capital rationing.

Answer is d) Capital Rationing