A firm is considering a new project whose risk is greater than the risk of the firm's average project, based on all methods for assessing risk.In evaluating this project, it would be reasonable for management to do which of the following?

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Quizplus · Accepted Answer

The most appropriate action in this situation would be to increase the cost of capital used to evaluate the project to reflect its higher-than-average risk. This is because the project's increased risk will likely require a higher return to compensate investors for accepting the risk. Option A is not appropriate because arbitrarily increasing the estimated NPV would not reflect the project's true level of risk. Option B is not appropriate because rejecting a project on the basis of increased risk alone is not a sound decision-making approach. Option C is not appropriate because the percentage of the firm's total assets that a project represents is irrelevant to the level of risk it poses. Option E is not appropriate because arbitrarily increasing the estimated IRR would not reflect the project's true level of risk.

A Firm Is Considering a New Project Whose Risk Is