Country risk should be incorporated into an international capital budgeting analysis by

Question

Quizplus · Accepted Answer

Country risk represents an additional risk that should be adjusted for in the international capital budgeting analysis. This can be done by increasing the firm's discount rate to compensate for the additional risk. By doing this, the expected cash flows are discounted more heavily, reflecting the fact that the project is riskier due to country risk factors. Increasing cash flow estimates or including the country risk premium to sunk costs may not be as effective in adequately capturing the additional risk associated with country risk.

Country Risk Should Be Incorporated into an International Capital Budgeting