Risk in a revenue-producing project can best be adjusted for by
A) Ignoring it.
B) Adjusting the discount rate upward for increasing risk.
C) Adjusting the discount rate downward for increasing risk.
D) Picking a risk factor equal to the average discount rate.
E) Reducing the NPV by 10 percent for risky projects.

Question

Quizplus · Accepted Answer

Adjusting the discount rate upward for increasing risk is the best way to account for risk in a revenue-producing project. This is because the discount rate is used to calculate the present value of future cash flows, and a higher discount rate reflects the higher risk associated with future cash flows. By adjusting the discount rate upward for increasing risk, the present value of future cash flows will be reduced, accounting for the potential negative impact of risk on the project's profitability.

Risk in a Revenue-Producing Project Can Best Be Adjusted for by