The correct discount rate for a firm to use in capital budgeting, assuming that new investments are as risky as the firm's existing assets, is its marginal cost of capital.

Question

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The correct discount rate to use in capital budgeting is the firm's marginal cost of capital. This rate reflects the cost of raising new funds to finance a new investment, and it takes into account the risk associated with the firm's existing assets. Therefore, if new investments are assumed to be as risky as existing assets, using the marginal cost of capital as the discount rate will account for the necessary level of risk in the decision-making process.

The Correct Discount Rate for a Firm to Use in Capital