Which of the following statements is most correct? O (a) When calculating NPV for cash flows of higher-than-average risk, the discount rate should always be adjusted upward to reflect the corporate cost of capital plus a risk premium. O (b) A weakness of the certainty equivalent method of adjusting project cash flows for risk is that it does not allow individual cash flows to be adjusted to reflect their own unique risk. O (c) The risk-adjusted discount rate method of valuation assigns equal risk to all project cash flows since a constant discount rate is applied over the life of the project. O (d) The certainty equivalent value of a net cash outflow will be higher (in absolute value) than the expected value if the cash outflow has greater-than-average risk.
Which of the following statements is most correct? O (a) When calculating NPV for cash flows of higher-than-average risk, the discount rate should always be adjusted upward to reflect the corporate cost of capital plus a risk premium. O (b) A weakness of the certainty equivalent method of adjusting project cash flows for risk is that it does not allow individual cash flows to be adjusted to reflect their own unique risk. O (c) The risk-adjusted discount rate method of valuation assigns equal risk to all project cash flows since a constant discount rate is applied over the life of the project. O (d) The certainty equivalent value of a net cash outflow will be higher (in absolute value) than the expected value if the cash outflow has greater-than-average risk.
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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Transcribed Image Text:Which of the following statements is most correct?
O (a) When calculating NPV for cash flows of higher-than-average risk, the discount rate should always be adjusted upward to
reflect the corporate cost of capital plus a risk premium.
O (b) A weakness of the certainty equivalent method of adjusting project cash flows for risk is that it does not allow individual cash
flows to be adjusted to reflect their own unique risk.
(c) The risk-adjusted discount rate method of valuation assigns equal risk to all project cash flows since a constant discount rate
is applied over the life of the project.
O (d) The certainty equivalent value of a net cash outflow will be higher (in absolute value) than the expected value if the cash
outflow has greater-than-average risk.
(e) None of these statements is correct.
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