Which of the following procedures best accounts for the relative risk of a proposed project?
A) Adjusting the discount rate downward if the project is judged to have above-average risk.
B) Reducing the NPV by 10% for risky projects.
C) Picking a risk factor equal to the average discount rate.
D) Ignoring risk because project risk cannot be measured accurately.
E) Adjusting the discount rate upward if the project is judged to have above-average risk.

Question

Quizplus · Accepted Answer

Adjusting the discount rate upward if the project is judged to have above-average risk is the best procedure to account for relative risk of a proposed project since it recognizes that higher risk projects should have higher required rates of return to compensate for the extra risk. Option A is incorrect as adjusting the discount rate downwards does not account for higher risk. Option B is incorrect as reducing the NPV by 10% for risky projects does not account for the degree of risk. Option C is incorrect as picking a risk factor equal to the average discount rate ignores the specific characteristics and risks of the proposed project. Option D is incorrect as risk cannot be ignored as it can significantly impact the success of the project.

Which of the Following Procedures Best Accounts for the Relative