If a firm's projects differ in risk, then one way of handling this problem is to evaluate each project with the appropriate risk-adjusted discount rate.

Question

Quizplus · Accepted Answer

It is true that evaluating each project with the appropriate risk-adjusted discount rate is one way to handle the problem of projects differing in risk. The risk-adjusted discount rate takes into account the level of risk associated with a project and adjusts the discount rate accordingly, so that projects with higher levels of risk are discounted at a higher rate. This helps to ensure that the cash flows from high-risk projects are appropriately valued and compared with the cash flows from lower-risk projects.

If a Firm's Projects Differ in Risk, Then One Way