Using the company's overall cost of capital to evaluate a project's cash flows is problematic in that the company is a collection of projects, with the possibility that each project has a different level of risk than the other projects currently working for the company.

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Quizplus · Accepted Answer

The statement is true. Using the company's overall cost of capital to evaluate a project's cash flows assumes that all projects have the same risk level, which is not always the case. Each project may have a different level of risk, and therefore, may require a different required rate of return. This is why project-specific cost of capital is often used for more accurate evaluation.

Using the Company's Overall Cost of Capital to Evaluate a Project's