Suppose that the actual cost of capital is 10%, but the firm chooses a discount rate of 18%.Managers of that company will be more likely to choose relatively short term investments.

Question

Quizplus · Accepted Answer

When the firm chooses a discount rate of 18% which is higher than the actual cost of capital of 10%, it means the firm is expecting higher returns on its investments. Therefore, managers will be more likely to choose relatively short term investments as they offer quicker returns compared to long term investments. This is because long term investments have a higher risk and uncertainty associated with them, which may not be suitable for the high discount rate set by the firm.

Suppose That the Actual Cost of Capital Is 10%, but the Firm