The appropriate interest rate to use in capital budgeting is:
A)always the company's cost of capital.
B)is the company's cost of capital if the project's risk is about the same as the company's.
C)the cost of capital plus any additional risk premium required to compensate for the project's higher risk.
D)b and c.

Question

Quizplus · Accepted Answer

The appropriate interest rate to use in capital budgeting is based on the project's risk level compared to the company's risk level. If the project's risk is about the same as the company's, then the company's cost of capital can be used. However, if the project has a higher level of risk, then an additional risk premium may need to be added to the cost of capital. Therefore, both choice B and choice C are correct, making the answer D.

The Appropriate Interest Rate to Use in Capital Budgeting Is