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 technique to account for additional project risk. This technique assumes that the project will generate less cash flow than originally expected due to increased risks, which is a conservative approach to project evaluation. Increasing the discount rate or adjusting the market risk premium may reflect a higher level of risk but do not account for the specific risks associated with the project. Increasing the Beta may reflect a higher level of market risk, but again does not account for the specific risks associated with the project.

Which of the Following Adjustment Techniques Would Be Preferred to Account