Question
Which of the following statements about project risk analysis is most correct? When calculating NPV for cash flows of higher-than-average risk, the discount rate should
Which of the following statements about project risk analysis is most correct? When calculating NPV for cash flows of higher-than-average risk, the discount rate should always be adjusted upward to reflect the corporate cost of capital plus a risk premium. A weakness of the certainty equivalent method of adjusting project cash flows for risk is that it does not allow individual cash flows to be adjusted to reflect their own unique risk. The risk-adjusted discount rate method of valuation assigns equal risk to all project cash flows since a constant discount rate is applied over the life of the project. The certainty equivalent value of a net cash outflow will be higher (in absolute value) than the expected value if the cash outflow has greater than average risk. None of the above statements is correct.
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