Kelly's uses the firm's weighted average cost of capital (WACC) as the required return for some of its projects. For other projects, the firms uses a rate equal to WACC plus 1 percent, while another set of projects is assigned rates equal to WACC minus some amount. Which one of the following factors should be the key factor the firm uses to determine the amount of the adjustment it will make when assigning the project a discount rate?

Question

Quizplus · Accepted Answer

The key factor that the firm should use to determine the amount of adjustment to its discount rate when assigning projects is the risk level of the project. Projects with higher risk levels should have discount rates that are higher than the WACC, while projects with lower risk levels should have discount rates that are lower than the WACC. The other factors listed may be relevant to determining the appropriate discount rate for a specific project, but they are not the key factor that should be used to determine the amount of the adjustment to the discount rate.

Kelly's Uses the Firm's Weighted Average Cost of Capital (WACC)