Ziker Golf Company is evaluating a capital budgeting project that has a higher risk than the average risk of its existing assets. When evaluating projects that are riskier than average, Ziker normally adjusts its required rate of return by 4 percent. Ziker requires a 12 percent return on average-risk projects. What required rate of return should Ziker use to compute the net present value (NPV) of the risky project it is currently evaluating?
A)8%
B)12%
C)16%
D)10%
E)48%

Question

Quizplus · Accepted Answer

Ziker Golf Company normally adjusts its required rate of return by 4 percent for projects with higher risk than average. Since Ziker requires a 12 percent return on average-risk projects, the required rate of return for a riskier project should be 16 percent (12% + 4%). Therefore, the company should use a 16 percent required rate of return to compute the NPV of the risky project it is currently evaluating.

Ziker Golf Company Is Evaluating a Capital Budgeting Project That