When determining the cost of capital for a new project, the firm should consider the:

Question

Quizplus · Accepted Answer

When determining the cost of capital for a new project, it is important to consider the cost of capital of a project of similar risk. This is because the cost of capital is influenced by the risk associated with the project. Projects with higher risk will have a higher cost of capital, while projects with lower risk will have a lower cost of capital. Therefore, considering the cost of capital of a project of similar risk will provide an accurate estimate of the cost of capital for the new project. Option A is incorrect because it is the IRR, not the discounted rate, that makes the NPV equal to zero. Option B is incorrect because the IRR does not take into account the cost of capital of the firm. Option D is incorrect because it is too broad and does not take into account the specific risk associated with the new project.

When Determining the Cost of Capital for a New Project