Which of the following adjustment techniques would be preferred to account for additional project risk?
A) Increase the discount rate.
B) Adjust expected cash flows downward.
C) Increase the beta.
D) Adjust the market risk premium.

Question

Quizplus · Accepted Answer

Adjusting expected cash flows downward is the preferred adjustment technique to account for additional project risk. This is because an increase in risk would decrease the expected cash flows, thus adjusting them downward accounts for the additional risk. Increasing the discount rate or adjusting the market risk premium would also result in decreased cash flows, but those adjustments are not specific to project risk and may not accurately reflect the project's risk. Increasing the beta is also not an appropriate adjustment technique as it relates to the systematic risk of a specific security rather than project risk.

Which of the Following Adjustment Techniques Would Be Preferred to Account