A criticism of adjusting the discount rate to account for political risk is that adjusting the discount rate for political risk penalizes early cash flows too heavily while not penalizing distant cash flows enough.

Question

Quizplus · Accepted Answer

When the discount rate is adjusted to account for political risk, the early cash flows are discounted at a higher rate, making them worth less in present value terms. This can result in early cash flows being undervalued, and distant cash flows being overvalued. This may not reflect the true risk of the investment, as political risk can affect both early and distant cash flows.

A Criticism of Adjusting the Discount Rate to Account for Political