If a project involves risk, managers can account for the risk by_______ the discount rate, which _______the present value of the future profits.
A)decreasing; increases
B)increasing; decreases
C)increasing; increases
D)decreasing; decreases

Question

Quizplus · Accepted Answer

When a project involves risk, its future cash flows become uncertain. Therefore, managers can increase the discount rate to account for the risk, which decreases the present value of the future profits. This means that the project's profitability would be lower than what was initially estimated due to higher uncertainty, and a higher level of compensation would be required to justify the investment. Thus, increasing the discount rate is the correct way to account for risk, and option B is the correct answer.

If a Project Involves Risk, Managers Can Account for the Risk