Suppose that the actual cost of capital is 10 percent,but the firm chooses a discount rate of 18 percent.Managers of that company will be more likely to choose relatively short term investments.

Question

Quizplus · Accepted Answer

Managers are more likely to choose short term investments when the discount rate is higher than the actual cost of capital. In this case, the discount rate of 18 percent is much higher than the actual cost of capital of 10 percent, so managers will prefer to invest in projects with shorter payback periods to minimize the risk of not meeting the required rate of return.

Suppose That the Actual Cost of Capital Is 10 Percent,but