If a project could have a bad outcome:
A) the discount rate should be increased.
B) expected cash flows should be adjusted downward to reflect this possibility.
C) the beta should be increased.
D) the market risk premium should be revised downward.

Question

Quizplus · Accepted Answer

If there is a possibility that a project could have a bad outcome, it is important to adjust the expected cash flows downward to reflect this risk. This will result in a lower net present value (NPV) for the project, which will make it less attractive from an investment standpoint. Increasing the discount rate, beta, or revising the market risk premium downward may also be factors to consider when assessing the risk of a project, but adjusting the expected cash flows is the most direct and relevant adjustment in this scenario.

If a Project Could Have a Bad Outcome