Which of the following procedures best accounts for the relative risk of a proposed project?

Question

Quizplus · Accepted Answer

The best procedure to account for the relative risk of a proposed project is adjusting the discount rate upward if the project is judged to have above-average risk. This is because a higher discount rate reflects a higher risk, which in turn means that the discounted cash flows of the project will be lower. This adjustment ensures that the project's NPV takes into account the additional risk involved, which in turn helps to make better investment decisions. Choice A is incorrect because adjusting the discount rate downward does not reflect the risk involved in the project. Choice B is incorrect because reducing the NPV by 10% for risky projects does not take into account the degree of risk involved. Choice C is incorrect because picking an average discount rate does not reflect the specific risk of the project. Choice D is incorrect because ignoring risk is not appropriate when making investment decisions.

Which of the Following Procedures Best Accounts for the Relative