What is the best approach to take into account of the relative risk of a proposed project?
A) adjusting the discount rate upward if the project is judged to have above-average risk
B) reducing the NPV by 10% for risky projects
C) picking a risk factor equal to the average discount rate
D) ignoring risk because project risk cannot be measured accurately

Question

Quizplus · Accepted Answer

Adjusting the discount rate upward if the project is judged to have above-average risk is the best approach to take into account of the relative risk of a proposed project. This is because the discount rate reflects the time value of money and the riskiness of the project. Increasing the discount rate takes into account the increased riskiness of the project and reduces the present value of the project's future cash flows.

What Is the Best Approach to Take into Account of the Relative