Example of nondiversifiable risk

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Reference no: EM132000801

1. Which one of the following is an example of a nondiversifiable risk?

a. a well-managed firm reduces its work force and automates several jobs

b. a well-respected president of a firm suddenly resigns

c. a key employee suddenly resigns and accepts employment with a key competitor

d. a well-respected chairman of the Federal Reserve suddenly resigns

e. a poorly managed firm suddenly goes out of business due to lack of sales

2. Bruin Sports is evaluating different soccer practice equipment. One of them costs $78,000, has a three-year life, and generates pre-tax savings of $34,000 per year. The relevant discount rate is 11.8 percent. Assume that the straight-line depreciation method is used and that the equipment is fully depreciated to zero. Also, assume the equipment has a market salvage value of $15,000 at the end of the project's life. The relevant tax rate is 35 percent. All cash flows occur at the end of the year. What is the NPV of this investment?

a. $3436.19

b. $-2804.57

c. $6945.43

d. $4172.60

e. $7630.49

Reference no: EM132000801

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