The company cost of capital may be an inappropriate discount rate for a capital budgeting proposal if:

Question

Quizplus · Accepted Answer

The company cost of capital is calculated taking into account the average risk of the company's operations. However, some projects may have a different degree of risk compared to the average, which means that using the company cost of capital as the discount rate may not accurately reflect the project's risk. In such a case, a different discount rate, such as the project's specific cost of capital, should be used to discount the future cash flows.

The Company Cost of Capital May Be an Inappropriate Discount