The preferred approach for risk adjustment of capital budgeting cash flows, from a practicalviewpoint, is
A) sensitivity analysis.
B) simulation.
C) risk-adjusted discount rates.
D) certainty equivalents.

Question

Quizplus · Accepted Answer

Risk-adjusted discount rates are the preferred approach for risk adjustment of capital budgeting cash flows from a practical viewpoint. Sensitivity analysis and simulation can provide insight into the impact of individual risks, but may not capture the overall effect on the project's cash flows. Certainty equivalents may oversimplify the analysis by assuming that all risks can be fully eliminated. Risk-adjusted discount rates provide a more complete picture of the expected cash flows based on the risk profile of the project.

The Preferred Approach for Risk Adjustment of Capital Budgeting Cash