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

The cost of capital used to discount a project's cash flows should always be equal to or greater than the company's overall cost of capital. Discounting the cash flows of a project at a lower cost of capital than the company's cost of capital would make the project appear more attractive than it actually is and could potentially lead to incorrect investment decisions. Therefore, discounting the project's cash flows at 20% when the project's cost of capital is only 15% would be incorrect.

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