The greater the uncertainty about a project's forecasted cash flows, the larger should be the discount rate applied to cash flows, other things being equal.

Question

Quizplus · Accepted Answer

This is because a higher discount rate reflects a higher level of risk, and greater uncertainty about a project's cash flows implies a higher level of risk. The discount rate should be adjusted accordingly to compensate investors for the higher risk.

The Greater the Uncertainty About a Project's Forecasted Cash Flows