Diversified Industries is a multiproduct company operating in a number of industries.Assume the company is analyzing a new project that has risks unrelated to those of the current company's products.When computing the net present value of the new project the cash flows should be discounted using

Question

Quizplus · Accepted Answer

The best choice for computing the net present value of a new project with risks unrelated to the current company's products is to discount the cash flows using a rate commensurate with the risk level of the project. This is because the risk of the new project is not reflected in the company's current beta or in the risk-free rate of return. Using a rate based on the market rate of return or a beta of one may not accurately reflect the risk level of the new project. Therefore, a rate commensurate with the risk level of the project is the most appropriate choice.

Diversified Industries Is a Multiproduct Company Operating in a Number