The discount rate assigned to an individual project should be based on:
A)the firm's weighted average cost of capital.
B)the actual sources of funding used for the project.
C)an average of the firm's overall cost of capital for the past five years.
D)the current risk level of the overall firm.
E)the risks associated with the use of the funds required by the project.

Question

Quizplus · Accepted Answer

The discount rate assigned to an individual project should be based on the risks associated with the use of the funds required by the project. This is because the discount rate is used to determine the present value of future cash flows, and the risks associated with the project determine the likelihood of those cash flows actually materializing. Therefore, the discount rate used should reflect the level of risk associated with the project.

The Discount Rate Assigned to an Individual Project Should Be