Assume a Firm Follows a Policy of Using Its Weighted

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The Answer is When one rate of return is used as the required rate for all projects,the low-risk,low-return projects will oftentimes be rejected,even if they have positive net present values at an appropriate discount rate.The high-risk,high-return projects will be the first projects accepted,whether they are actually profitable or not given an appropriate discount rate.As the firm continues to adopt the highest-risk projects and reject the lowest-risk projects,the firm itself will become riskier.To help prevent this,each project should be assigned a discount rate based on the use of funds.Both the subjective approach and the pure play approach are designed to do this.

Assume a Firm Follows a Policy of Using Its Weighted

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