Essay Questions
1. NPV
According to the text, the NPV rule states that "An investment should be accepted if the NPV is positive and rejected if it is negative." What does an NPV of zero mean? If you were a decision-maker faced with a project with a zero NPV (or very close to zero) what would you do? Why?
2. FORECASTING ERROR (RISK)
What is a "forecasting error"? Why is it important to the analysis of capital expenditure projects?
Discussion questions
- How can you compare "tulip mania" from 17th century Holland to the dot.com debacle of the 20th century from a financial point of view?
- Name and explain three ways in which the Internet revolution changed the lives of ordinary citizens.
- How did the birth of online discount stock brokerages impact the Internet revolution?
- If you were an investor during the dot.com revolution, and you invested primarily in technology stocks, what fundamental principle of finance did you ignore and how did it affect the value of your portfolio?
- What is diversification and what is its value for investors' portfolios?
- Explain the relationship between the potential return on a common stock and the risk of that stock.