One way to account for the challenge of the variability of future cash flows is to ________.
A) adjust the hurdle rate for the project
B) use the most likely cash flow estimate
C) ignore different rates of inflation to prevent confusion
D) leave out a consideration of the terminal value of an investment

Question

Quizplus · Accepted Answer

Adjusting the hurdle rate for the project can account for the variability of future cash flows. A higher hurdle rate can be used for riskier projects, while a lower hurdle rate can be used for less risky projects. This ensures that the project's expected return is commensurate with its risk. Using the most likely cash flow estimate or ignoring inflation rates does not fully account for variability in cash flows, while leaving out a consideration of the terminal value of an investment could result in significant undervaluation of the investment.

One Way to Account for the Challenge of the Variability