19. Fudge factors (S9.3) Mom and Pop Groceries has just dispatched a year’s supply of groceries to the government of the Central Antarctic Republic. Payment of $250,000 will be made one year hence after the shipment arrives by snow train. Unfortunately, there is a good chance of a coup d’état, in which case the new government will not pay. Mom and Pop’s controller therefore decides to discount the payment at 40% rather than at the company’s 12% cost of capital.

a. What’s wrong with using a 40% rate to offset political risk?