When is the risk-adjusted discount rate approach considered preferable to the weighted cost of capital approach in determining the net present value of a project?
A)It is preferable when the projects under consideration differ significantly in the number of cash flows generated by the projects.
B)It is preferable when the projects under consideration differ significantly in their total return.
C)It is preferable when the projects under consideration differ significantly in their cash inflows.
D)It is preferable when the projects under consideration differ significantly in their risk characteristics.

Question

Quizplus · Accepted Answer

The risk-adjusted discount rate approach is considered preferable when the projects under consideration differ significantly in their risk characteristics. This is because the approach takes into account the differences in risk levels between projects and adjusts the discount rate accordingly. On the other hand, the weighted cost of capital approach does not account for such differences in risk levels and assumes a single discount rate for all projects. Thus, the risk-adjusted discount rate approach is more appropriate when there are significant differences in the risk levels of the projects being evaluated.

When Is the Risk-Adjusted Discount Rate Approach Considered Preferable to the Weighted