Question

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 selling price of recycled cardboard can fluctuate dramatically, depending on the market conditions. By creating models that used different assumptions for the selling price of recycled cardboard but keeping all other inputs in the model the same, the CFO demonstrated the effect of fluctuations in the price of recycled cardboard.

1) Based on the information given, determine which of the statements is correct.

A. The company’s CFO performed a scenario analysis on the project’s financial model.

B. The company’s CFO was conducting a sensitivity analysis on the project’s financial model.

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?

A. Corporate, or within-firm, risk

B. Stand-alone risk

C. Market, or beta, risk

3) The problem with using _______ 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.

A. market risk

B. a risk-adjusted cost of capital

C. corporate, or within-firm risk

D. stand-alone risk

Answer 1

1.
B. The company’s CFO was conducting a sensitivity analysis on the project’s financial model.

2.
A. Corporate, or within-firm, risk

3.
B. a risk-adjusted cost of capital