Using the firm's overall cost of capital to evaluate a project's cash flows is problematic in that the firm 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 firm.

Question

Quizplus · Accepted Answer

The overall cost of capital may not accurately reflect the level of risk associated with a specific project, which can result in incorrect evaluation or potentially lead to accepting projects with higher risk than the firm is comfortable with.

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