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

Question

Quizplus · Accepted Answer

Adjusting the discount rate upward if the project is judged to have above-average risk is the best procedure to account for the relative risk of a proposed project. This is because a higher discount rate reflects a higher risk premium, which compensates investors for the added risk of the project. This approach is more nuanced and reflects the actual risk profile of the project, unlike option B which applies a one-size-fits-all 10% reduction to NPV for all risky projects. Option A is also a possible approach, but adjusting the discount rate downward would reduce the risk premium and underestimate the actual risk of the project. Option C is too simplistic and ignores the specific risk characteristics of the project. Finally, option D is not a valid approach, as all projects carry some level of risk, and ignoring risk would result in an inaccurate evaluation of the project's potential.

Which of the Following Procedures Best Accounts for the Relative