Principles of Managerial Finance

c. Compare and contrast your finding in parts aand b.Which plan would you

recommend? Did explicit recognition of the risk differences of the plans affect

this recommendation?

d. Use the real-options data given above for each plan to find the strategic NPV,

NPVstrategic, for each plan.

e. Compare and contrast your findings in part dwith those in part b.Did

explicit recognition of the real options in each plan affect your recom-

mendation?

f. Would your recommendations in parts a, b,and dbe changed if the firm

were operating under capital rationing? Explain.

WEB EXERCISE Go to the Contingency Analysis Web site, http://www.contingencyanalysis.com. Scroll
down the page and click Fundamentals. Then click on Risk Intuition.

1. Take the seven-question quiz. Were you surprised at the answers?
   Return to the Fundamentalspage and click on Risk Measures.


2. Describe the three categories of risk measures and how they could be used in
   capital budgeting analysis.
   Scroll down the Risk Measures menu in the lower left frame and click on Asset
   Liability Analysis.


3. Why are statistical risk measures less satisfactory in determining asset risk?


4. Summarize the steps to analyze asset risk.


5. Using the following project description, explain how you would analyze the
   risk.


6. What types of assumptions would you change to create new cash flows?
   Consider various market factors such as timing for project implementation,
   inflation, capital costs, and so forth.

Purchase of

Automated Equipment

for a New Assembly Line

Initial cost: $6,600,000

Expected incremental cash inflows:

Year 1 $1,280,000

Year 2 1,640,000

Year 3 1,820,000

Year 4 2,030,000

Year 5 2,450,000

CHAPTER 10 Risk and Refinements in Capital Budgeting 463

WW

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Remember to check the book’s Web site at

http://www.aw.com/gitman

for additional resources, including additional Web exercises.