In the context of capital budgeting, risk refers to
A) the chance that the internal rate of return will exceed the cost of capital.
B) the chance that the net present value will be greater than zero.
C) the degree of variability of the initial investment.
D) the degree of variability of the cash inflows.

Question

Quizplus · Accepted Answer

In capital budgeting, risk refers to the degree of variability of the cash inflows. This is because the variability of cash inflows can have a significant impact on the overall profitability of the project and the ability to generate a positive net present value. A project with highly variable cash flows is generally considered riskier than one with more stable cash flows. Therefore, it is important to take into account the risk associated with cash inflows when evaluating capital budgeting projects. Choices A and B are incorrect because they refer to measures of profitability rather than risk. Choice C is also incorrect because the variability of the initial investment is not a measure of risk in capital budgeting.

In the Context of Capital Budgeting, Risk Refers to