Diversified Industries is a multi-product firm operating in a number of industries.Assume the firm is analyzing a new project that has risks unrelated to those of the current firm's product.When computing the net present value of the new project the cash flows should be discounted using:

Question

Quizplus · Accepted Answer

The cash flows of the new project should be discounted using a rate commensurate with the risk level of the project, since the risks for this project are unrelated to those of the current firm's product. Using the firm's current beta or a beta of one would not take into account the specific risks of the new project, and using the risk-free rate or market rate of return would not adequately account for the riskiness of the project. Therefore, choice E is the best option.

Diversified Industries Is a Multi-Product Firm Operating in a Number