Asked by Özge SA?IR on May 05, 2024
Verified
Ignoring risk in capital budgeting can lead to incorrect decisions and change the risk character of the firm.
Capital Budgeting
The process by which a business evaluates and selects long-term investments that are expected to yield returns over a period of time.
Risk Character
A term describing the unique attributes and level of risk associated with an investment or financial decision.
- Recognize the critical role of risk in the decision-making process for capital budgeting.
Verified Answer
MA
Mohamad ali El haririMay 07, 2024
Final Answer :
True
Explanation :
Ignoring risk in capital budgeting can lead to incorrect decisions as it does not account for the possibility of negative outcomes or the likelihood of risk occurring. This can result in investments being made that are too risky and not profitable for the firm in the long run. It can also change the risk character of the firm by increasing its overall risk exposure if risky investments are consistently chosen. Therefore, it is important to consider risk in capital budgeting decisions to make informed and accurate choices that align with the firm's risk tolerance and overall goals.
Learning Objectives
- Recognize the critical role of risk in the decision-making process for capital budgeting.
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