A firm is considering the purchase of an asset whose risk is greater than the cu

Question

A firm is considering the purchase of an asset whose risk is greater than the current risk of the firm, based on any method for assessing risk. In evaluating this asset, the decision maker should

Question 7 options:

Increase the IRR of the asset to reflect the greater risk.

Increase the NPV of the asset to reflect the greater risk.

Reject the asset, since its acceptance would increase the risk of the firm.

Ignore the risk differential if the asset to be accepted would comprise only a small fraction of the total assets of the firm.

Increase the cost of capital used to evaluate the project to reflect the higher risk of the project.

Increase the IRR of the asset to reflect the greater risk.

Increase the NPV of the asset to reflect the greater risk.

Reject the asset, since its acceptance would increase the risk of the firm.

Ignore the risk differential if the asset to be accepted would comprise only a small fraction of the total assets of the firm.

Increase the cost of capital used to evaluate the project to reflect the higher risk of the project.

Explanation / Answer

Increase the cost of capital used to evaluate the project to reflect the higher risk of the project.

Since the project has higher risk, cost of capital used to evaluate should be higher than normal cost of capital.

Increase the cost of capital used to evaluate the project to reflect the higher risk of the project.

Since the project has higher risk, cost of capital used to evaluate should be higher than normal cost of capital.

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