If a given project is less risky than the firm's overall risk level,the following adjustment must be made to the APV formula:

Question

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If a given project is less risky than the firm's overall risk level, then the cost of capital for that project should be decreased in the APV formula. This is because a lower risk project would require a lower return on investment to compensate for the lower level of risk. As a result, the overall present value of the project's expected cash flows would be higher, which would increase the project's attractiveness to the firm.

If a Given Project Is Less Risky Than the Firm's