Problems with Using the Same Company-Wide Cost of Capital for All

question 93

Multiple Choice

Problems with using the same company-wide cost of capital for all projects potentially include

• A) biasing project selection toward high risk, high return projects.
• B) rejection of worthwhile low risk projects.
• C) spending an unjustified amount of managerial time and effort justifying a lower cost of capital so that pet projects will be accepted.
• D) all of the above.

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Definitions:

Net Present Value

The sum of all future cash flows, both incoming and outgoing, of an investment, discounted back to their present value to analyze its profitability.

Investment Project

A project involving the allocation of capital resources to long-term assets that produce returns over time.

Working Capital

A measure of a firm's short-term financial health and its ability to cover its short-term obligations with its short-term assets.

Discount Factor

A multiplier used to discount future cash flows back to their present value, reflecting the time value of money.