The subjective approach to project analysis:
A) is used only when a firm has an all-equity capital structure.
B) uses the WACC of Firm X as the basis for the discount rate for a project under consideration by Firm Y.
C) assigns discount rates to projects based on the discretion of the senior managers of a firm.
D) allows managers to randomly adjust the discount rate assigned to a project once the project's standard deviation has been determined.
E) applies a lower discount rate to projects that are financed totally with equity as compared to those that are partially financed with debt.

Question

Quizplus · Accepted Answer

The subjective approach to project analysis assigns discount rates to projects based on the discretion of the senior managers of a firm, rather than based on objective factors such as the WACC or the project's risk. This approach can lead to bias and inconsistent decision-making.

The Subjective Approach to Project Analysis