Which of the Following Procedures Best Accounts for the Relative

question 36

Multiple Choice

Which of the following procedures best accounts for the relative risk of a proposed project?

• A) Adjusting the discount rate downward if the project is judged to have above-average risk.
• B) Reducing the NPV by 10% for risky projects.
• C) Picking a risk factor equal to the average discount rate.
• D) Ignoring risk because project risk cannot be measured accurately.
• E) Adjusting the discount rate upward if the project is judged to have above-average risk.

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Definitions:

Ceteris Paribus

A Latin phrase meaning "all other things being equal," used to analyze the effect of one variable on another by holding all other relevant factors constant.

Other Things Equal

A Latin term (ceteris paribus) used in economics to signify examining the effect of one changing factor when all other factors remain constant.

Normative Economic Statement

An opinion or judgment that reflects values or what ought to be, rather than factual claims about what is.

Social Security

A government program designed to provide financial support to individuals during retirement, disability, or upon the death of a primary wage earner.