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Chapter 11 Finance 362
Terms in this set (9)
the immediate cash outflow necessary to purchase the asset and put it in operating order.
Project standing alone risk
a project's risk ignoring the fact that much of its risk will be diversified away.
Contribution to firm risk
the amount of risk that the project contributes to the firm as a whole; this measure considers the fact that some of the project's risk will be diversified away as the project is combined with the firm's other projects and assets but ignores the effects of diversification of the firms shareholders.
the risk of the project from the viewpoint of a well diversified shareholder;this measure takes in to account that some of a project is combined with the firm's other projects, and, in addition, some of the remaining risk will be diversified away by shareholders as they combine this stock with other stocks in their portfolios.
Risk-adjusted discount rate
a method of risk adjustment when the risk associated withe the investment is greater than the risk involved in a typical endeavor. Using this method, the discount rate is adjusted upward to compensate for this added risk.
Pure play method
a method for estimating a project's or division's beta that attempts to identify publicly traded firms engaged solely in the same business as the project or division.
a method for dealing with risk where the performance of the project under evaluation is estimated by randomly selecting observations from each of the distributions that affect the outcome of the project and continuing with this process until a representative record of the project's probable outcome is assembled.
a simulation approach for gauging a project's risk under the worst, best, and most likely outcomes. The firm's management examines the distribution of the outcomes to determine the project's level of risk and then makes the appropriate adjustment.
a method for dealing with risk where the change in the distribution of possible net present values or internal rates of return for a particular project resulting from a change in one particular input variable is calculated. This is done by changing the value of one input variable while holding all other input variable constant.
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