1. a. Why is risk analysis so important to the capital budgeting process?

b. Describe the three types of project risk. Under what situation is each of the types most relevant to the capital budgeting decision?

c. Which type of risk is easiest to measure in practice?

d. Are the three types of project risk usually highly correlated? Explain your answer.

e. Why is the correlation among project risk measures important

2. a. Briefly describe sensitivity analysis.

b. What are its strengths and weaknesses?

3. a. Briefly describe scenario analysis.

b. What are its strengths and weaknesses?

4. a. Briefly describe Monte Carlo simulation.

b. What are its strengths and weaknesses?

5. a. How is project risk incorporated into a capital budgeting analysis?

b. Suppose that two mutually exclusive projects are being evaluated on the basis of cash costs. How would risk adjustments be applied in this situation

6. What is the difference between the corporate cost of capital and a project cost of capital?

7. What is meant by the term capital rationing? From a purely financial standpoint, what is the optimal capital budget under capital rationing?

8. Santa Roberta Clinic has estimated its corporate cost of capital to be 11 percent. What are reasonable values for the project costs of capital for low-risk, average-risk, and high-risk projects?

9. Under what conditions should a business estimate divisional costs of capital?

10. Describe the qualitative approach to risk assessment. Why does this approach, which does not rely on numerical data, work?