The subjective approach to project analysis:
A)is used only when a firm has an all-equity capital structure.
B)uses the WACC of firm X as the basis for the discount rate for a project under consideration by firm Y.
C)assigns discount rates to projects based on the discretion of the senior managers of a firm.
D)allows managers to randomly adjust the discount rate assigned to a project once the project's beta has been determined.
E)applies a lower discount rate to projects that are financed totally with equity as compared to those that are partially financed with debt.

Question

Quizplus · Accepted Answer

The subjective approach to project analysis involves assigning discount rates to projects based on the discretion of senior managers of a firm. This approach is subjective because the discount rate is not based on any objective measure or market information. It is based purely on the manager's judgment and perception about the risks and benefits of a project. This makes it a less reliable approach compared to other more objective methods of project analysis.

The Subjective Approach to Project Analysis