If the Risk of an Investment Project Is Different Than

question 11

Multiple Choice

If the risk of an investment project is different than the firm's risk then:

• A) you must adjust the discount rate for the project based on the firm's risk.
• B) you must adjust the discount rate for the project based on the project risk.
• C) you must exercise risk aversion and use the market rate.
• D) an average rate across prior projects is acceptable because estimates contain errors.
• E) one must have the actual data to determine any differences in the calculations.

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Definitions:

Cash Payback Method

A financial analysis method used to determine the time needed for an investment to generate cash flows sufficient to recover the initial investment cost.

Present Value

The current value of a future amount of money or stream of cash flows given a specified rate of return.

Capital Rationing

A strategy or decision-making process that involves allocating and limiting investment funds to various projects to maximize a company's value.

Annuity

A financial product that pays out a fixed stream of payments to an individual, primarily used as an income stream for retirees.