Question

A firm is considering a new project whose risk is greater than the risk of the firm's average project, based on all methods for assessing risk. In evaluating this project, it would be reasonable for management to do which of the following?
a) Increase the cost of capital used to evaluate the project to reflect the project's higher-than-average risk.

b) Reject the project, since its acceptance would increase the firm's risk.

c) Increase the estimated IRR of the project to reflect its greater risk.

d) Ignore the risk differential if the project would amount to only a small fraction of the firm's total assets.

Answer 1

Answer:A. Increase the cost of capital used to evaluate the project to reflect the project's higher-than-average risk.

Explanation:Risk is any a action or activity that has the potential to lead to or cause damage or losses to lives,funds,properties etc.

There are different types of risk which includes financial risks (which deals with losses in funds or investment), business risk(a risk directly involved with the business), non Business risk(risks that are associated with other aspects of society and are not business related).

WHEN THE A PROJECT HAS A HIGHER RISK COMPARED TO OTHERS THE BEST ACTION TO TAKE IS TO INCREASE THE COST OF CAPITAL USED TO EVALUATE THE PROJECT RO SHOW THAT THE PROJECT HAS A HIGHER RISK.

Answer 2

Answer:

a) Increase the cost of capital used to evaluate the project to reflect the project's higher-than-average risk.

Explanation:

The firm will evaluate the project with a higher cost of capital when doing their calculations It will not rejected inmediately as in some cases the firm will only find project with a higher risk because, economy crisis hit or the sector is in crisis or other reasons but, the firm has to continue to do business in these enviroments.

Increasing the cost of capital will ensure the project analisys does agood trade-off between additional risk and adidtional rewards