The relative risk of a proposed project is best accounted for by which of the following procedures?
A) Adjusting the discount rate upward if the project is judged to have above-average risk.
B) Adjusting the discount rate downward if the project is judged to have above-average risk.
C) Reducing the NPV by 10% for risky projects.
D) Picking a risk factor equal to the average discount rate.
E) Ignoring risk because project risk cannot be measured accurately.

Question

Quizplus · Accepted Answer

Adjusting the discount rate upward for projects with above-average risk accounts for the increased uncertainty and potential variability in returns, thus providing a more conservative estimate of the project's value.

The Relative Risk of a Proposed Project Is Best Accounted