General Forge and Foundry Co. is considering investing in a project in which the
ID: 2383431 • Letter: G
Question
General Forge and Foundry Co. is considering investing in a project in which the risk is greater than the firms current risk based on any method for assessing risk. Which of the following should management do when evaluating this project?
A. To take the higher risk level into account, they will need to increase the IRR of the project
B. To take the higher risk level into account, they will need to use a discount rate that is greater than the cost of capital to evaluate the project
C. They should always reject the project, because it will increase the firm's risk level
D. To tae the higher risk level into account they will need to ncrease the NPV of the project
Explanation / Answer
The correct answer is :
B. To take the higher risk level into account, they will need to use a discount rate that is greater than the cost of capital to evaluate the project
higher-risk project requires a discount rate that is higher than the WACC; a lower-risk project requires a discount rate that is lower than the WACC
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