Firms have no way to directly estimate the discount rate that reflects the risk of

Question

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The discount rate that reflects the risk of incremental cash flows from a particular project is known as the project's cost of capital. It is determined by estimating the risk associated with the project and then adding a risk premium to a risk-free rate. There is no direct or easy way for firms to estimate this discount rate, as it is based on subjective assessments of various risk factors. Therefore, firms often use a combination of historical data, industry benchmarks, and expert judgments to estimate the cost of capital for a particular project.

Firms Have No Way to Directly Estimate the Discount Rate