Risk is incorporated into the decision to grant credit by:
A) decreasing the discount rate.
B) altering the credit period.
C) decreasing the cash inflows, or the numerator of the NPV formula.
D) increasing the cash inflows, or the numerator of the NPV formula.
E) increasing costs per unit.

Question

Quizplus · Accepted Answer

Decreasing the cash inflows, or the numerator of the NPV formula, incorporates risk into the decision to grant credit. This is because a lower NPV indicates a higher risk, and therefore a lower likelihood of the loan being repaid.

Risk Is Incorporated into the Decision to Grant Credit By