The Relative Risk of a Proposed Project Is Best Accounted

question 50

Multiple Choice

The relative risk of a proposed project is best accounted for by which of the following procedures?

• A) Adjusting the discount rate upward if the project is judged to have above-average risk.
• B) Adjusting the discount rate downward if the project is judged to have above-average risk.
• C) Reducing the NPV by 10% for risky projects.
• D) Picking a risk factor equal to the average discount rate.

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Definitions:

Machinery and Equipment

Long-term assets used in the operation of a business, typically for manufacturing, processing, or office operations.

Land

A natural resource that refers to the earth's surface not covered by water, which can be used for agriculture, construction, or as an investment.

Insurance

A financial product that provides protection against losses or damages, typically in the form of a policy for which the insured pays a premium.

Residual Value

The calculated estimate of what an asset will be worth when it reaches the end of its functional life.