Using the same discount rate to evaluate projects with differing degrees of risk would,over time,cause the firm to accept too many high-risk projects and to reject too many low-risk proposals.

Question

Quizplus · Accepted Answer

Using the same discount rate for all projects regardless of their risk level would lead to overemphasizing the benefits of high-risk projects, making them appear more attractive than they actually are, while simultaneously undervaluing the benefits of low-risk projects, making them seem less profitable than they would be. As a result, the firm may accept too many high-risk projects and reject too many low-risk proposals, which could hurt its overall financial performance. Therefore, it's important for the firm to adjust the discount rate to reflect the risk associated with each project or use other risk-adjusted evaluation methods to make more informed decisions.

Using the Same Discount Rate to Evaluate Projects with Differing