Which one 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 would reflect the additional project risk by reducing the expected future cash flows, which would result in a lower present value of the project. This adjustment technique is preferable to the others listed because it directly accounts for the additional project risk. Increasing the discount rate would also account for increased risk, but it may not accurately reflect the specific risks associated with the project. Increasing the beta and adjusting the market risk premium would primarily reflect changes in the systematic risk of the overall market, rather than the specific risks associated with the project.

Which One of the Following Adjustment Techniques Would Be Preferred