If the company cost of capital is 20% and a proposed project's cost of capital is 15%, then discounting the projects' cash flows at 20% would:
A)Determine where the project plots in relation to the security market line
B)Make the project look more attractive
C)Be correct from a theoretical perspective
D)Be incorrect.

Question

Quizplus · Accepted Answer

Discounting the project's cash flows at the 20% cost of capital, which is higher than the project's cost of capital, would not be correct from a theoretical perspective as it would overestimate the required rate of return for the project. The correct discount rate for the project would be its own cost of capital of 15%. Choosing a higher discount rate would make the project look less attractive, not more attractive, and it would not help determine where the project plots on the security market line.

If the Company Cost of Capital Is 20% and a Proposed