A firm is considering a new project whose risk is greater than the risk of the f

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?
____
Increase the estimated IRR of the project to reflect its greater risk
Reject the project, since its acceptance would increase the firm’s risk
Ignore the risk differential if the project would amount to only a small fraction of the firm’s total assets
Increase the cost of capital used to evaluate the project to reflect the project’s higher-than-average risk

Explanation / Answer

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

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