A bakery company is considering one capital budgeting project involving the replacement of a sophisticated brick oven,and another capital budgeting project involving research and development into synthetic food substitutes.Which of the following statements is MOST correct concerning the risk-adjusted discount rate(s)for the projects?

Question

Quizplus · Accepted Answer

The risk-adjusted discount rate for the research and development project should be higher due to the uncertainty involved with such projects. The replacement project involves a known technology and is less risky, which would result in a lower risk-adjusted discount rate. The fact that both projects are being considered by the same company with the same shareholders does not necessarily mean that they should have the same discount rate. The discount rate should reflect the level of risk associated with each project.

A Bakery Company Is Considering One Capital Budgeting Project Involving