K the three measures of a projects risk are 1 total

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k. The three measures of a project’s risk  are (1) total project risk , which is a project’s risk ignoring the fact  that much of this risk will be diversified away as the project is combined with the firm’s other projects  and assets; (2) firm risk , which 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 firm’s shareholders and (3) systematic risk , which considers the fact that some of a  project’s risk will be diversified away as the project is combined with the firm’s other projects. l. According to the CAPM, systematic risk is the only relevant risk for capital-budgeting purposes;  however,   reality   complicates   this   somewhat.     In   many   instances,   a   firm   will   have   undiversified  shareholders; for them, the relevant measure of risk is the project’s contribution to firm risk.   The  possibility of bankruptcy also affects our view of what measure of risk is relevant.  Because the project’s  contribution to firm risk can affect the possibility of bankruptcy, this may be an appropriate measure of  risk since there are costs associated with bankruptcy.   m. The idea behind simulation is to imitate the performance of the project being evaluated.  This is done by 
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  • Spring '11
  • Abner
  • Operating cash flow, Flow network, free cash, CASH   FLOW

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