The discount rate applied to an individual project should be based on the:

Question

Quizplus · Accepted Answer

The discount rate used to evaluate the present value of cash flows should reflect the riskiness of those cash flows. Projects that have uncertain or volatile cash flows should be discounted at a higher rate than more stable, less risky projects. The discount rate should not be based on sources of funding, the sponsoring firm's average risk, or the expertise of the project's managers. The size and duration of the project's life may impact the decision to undertake the project, but they are not relevant to setting the discount rate.

The Discount Rate Applied to an Individual Project Should Be