Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
How can we aggregate the risk over the project life in terms of
Expert Solution
Step 1
It is an incorporation of the risk level of the project over the life of the in terms of NPV by way of capital budgeting technique.
Firstly, the adjustment of the discount rate is to be done in order to reflect the higher risk. As a project having more risks will utilize a higher risk-adjusted rate.
NPV should be computed by the usage of a new discount rate (risk-adjusted)
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