The discount rate assigned to an individual project should be based on:
A) the company's overall weighted average cost of capital.
B) the actual sources of funding used for the project.
C) an average of the company's overall cost of capital for the past five years.
D) the current risk level of the overall firm.
E) the risks associated with the use of the funds required by the project.

Question

Quizplus · Accepted Answer

The discount rate for an individual project should reflect the risks associated with the use of funds required by the project. Factors such as the project's size, complexity, and expected cash flows should be considered when determining the discount rate. The discount rate should be higher for riskier projects and lower for less risky projects. While the company's overall weighted average cost of capital may be used as a starting point, it should be adjusted to reflect the specific risks associated with the project. Therefore, the best answer is E.

The Discount Rate Assigned to an Individual Project Should Be