Asked by Raabiah Azeez on May 30, 2024
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A firm is considering a new project whose risk is greater than the risk of the firm's average project,based on all methods for assessing risk.In evaluating this project,what would it be reasonable for management to do?
A) increase the estimated IRR of the project to reflect its greater risk
B) reject the project, since its acceptance would increase the firm's risk
C) ignore the risk differential if the project would amount to only a small fraction of the firm's total assets
D) increase the cost of capital used to evaluate the project to reflect the project's higher-than-average risk
Risk-adjusted Cost of Capital
The rate of return that must be achieved in order to compensate for the risk of an investment, adjusting the cost of capital according to the risk involved.
IRR Estimate
An estimation of the Internal Rate of Return, which is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.
Asset's Total Assets
The summation of everything of value owned by a person, company, or organization, including both current and non-current assets.
- Comprehend the various methods of risk assessment and their implications on capital budgeting decisions.
- Acquire knowledge about the critical role of selecting the suitable risk-adjusted rate for discounting cash flows.
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Learning Objectives
- Comprehend the various methods of risk assessment and their implications on capital budgeting decisions.
- Acquire knowledge about the critical role of selecting the suitable risk-adjusted rate for discounting cash flows.
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