Where are the risk premium and time premium associated with a project incorporated in the NPV analysis?
A)in both the expected future cash flows of the project and the cost of capital of the project
B)in the cost of capital, which is the discount rate used
C)in the expected future cash flows of the project
D)None of the above is correct.

Question

Quizplus · Accepted Answer

Risk premium and time premium are incorporated in the cost of capital, which is the discount rate used in the NPV analysis. The expected future cash flows of the project are not directly affected by these premiums. The risk premium and time premium are incorporated in the cost of capital, which is used as the discount rate in the NPV analysis. Therefore, the correct choice is B, which states that the risk premium and time premium are included in the cost of capital, and not in the expected future cash flows of the project.

Where Are the Risk Premium and Time Premium Associated with a Project