When evaluating capital budgeting projects, how do most firms incorporate risk in their decision-making analyses?
A)Most firms do not consider risk when making capital budgeting decisions; that is, they ignore it.
B)Most firms increase the required rate of return used in their capital budgeting analyses when evaluating projects with higher-than-average risks.
C)Most firms decrease the required rate of return used in their capital budgeting analyses when evaluating projects with higher-than-average risks.
D)Most firms use the same required rate of return to evaluate all capital budgeting projects, because the risk associated with an individual capital budgeting project is not important when determining the overall riskiness of the firm.
E)Most firms decrease the required rate of return used in their capital budgeting analyses by 6 percent when evaluating projects with lower-than-average risks.

Question

Quizplus · Accepted Answer

Most firms incorporate risk in their capital budgeting decision-making analyses by increasing the required rate of return used in their analyses for projects with higher-than-average risks. This is because the required rate of return should reflect the risk associated with a project, and higher risk projects require a higher rate of return to compensate investors for the increased risk.

When Evaluating Capital Budgeting Projects, How Do Most Firms Incorporate