Suppose the Destin Sand Companys management evaluates investment opportunities by grouping projects into three risk classes: low,

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Suppose the Destin Sand Company’s management evaluates investment opportunities by grouping projects into three risk classes: low, average, and high risk. They assign a cost of capital to each group and use this cost of capital to discount a project’s future cash flows:

5% for low risk, 10% for average risk, and 15% for high risk projects. Critique their method of adjusting for risk.

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