A firm should never undertake an investment if accepting the project would cause an increase in the firm's required rate of return.

Question

Quizplus · Accepted Answer

This statement is false. Accepting a project may increase the firm's required rate of return if it is riskier than the firm's average project or if the investment affects the firm's overall risk level. However, a firm may still undertake the investment if the potential return on the project is higher than the increased required rate of return. Ultimately, the decision to accept or reject a project should be based on whether it creates value for the firm and its shareholders.

A Firm Should Never Undertake an Investment If Accepting the Project