Which of the following statements about the risk-adjusted discount rate approach and the certainty equivalent approach to project evaluation is most correct?
A)NPVs will differ under either method according to the 'risk adjustment factor'.
B)NPVs should be the same under either approach.
C)NPVs are generally higher using the 'risk-adjusted discount rate' approach.
D)NPVs are generally lower using the 'risk-adjusted discount rate' approach.

Question

Quizplus · Accepted Answer

The risk-adjusted discount rate approach and the certainty equivalent approach are both methods designed to account for risk in project evaluation, but they do so in different ways. Despite their differences, when applied correctly, both methods should theoretically lead to the same Net Present Value (NPV) for a given project. This is because both methods aim to adjust for risk, either by adjusting the discount rate or by adjusting the cash flows, to reflect the project's risk profile accurately.

Which of the Following Statements About the Risk-Adjusted Discount Rate