Each Project Should Be Evaluated Using Its Own Cost of Capital

question 14

Multiple Choice

Each project should be evaluated using its own cost of capital because:

• A)of the effectiveness of the capital market in providing opportunities for investors to diversify.
• B)diversification by a company creates value for companies.
• C)risk of cash flows generated from a project depends upon the entire operations of a company.
• D)beta values are readily available on a project-by-project basis.

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Definitions:

Discounted Value

Discounted value is the present value of a future amount of money or stream of cash flows given a specified rate of return, reflecting the time value of money.

Present Value

The current worth of a future sum of money, given a specific rate of return or discount rate.

Future Value

The value of an investment or cash at a specified future date, considering the interest rate or rate of return.

Term

A specific period or duration of time during which the conditions of a contract or agreement apply.