25. The risk-adjusted discount rate approach is preferable to the weighted cost

Question

25. The risk-adjusted discount rate approach is preferable to the weighted cost of capital approach when (Points : 3)        all projects have the same risk characteristics
       the risk-free rate is known with certainty
       the projects under consideration have different risk characteristics
       the firm is unlevered

       3COM
       Just the Fax
       Neither, both have the same risk
       Cannot be determined

Question 26. 26. Injection Aluminium Mines, Inc. is considering adoption of a new project requiring a net investment of $10 million. The project is expected to generate 5 years of net cash inflows of $5 million per year. In the project's sixth, and final year, it is expected to have a net cash outflow of $1 million. What is the project's risk adjusted net present value? The company's cost of capital is 7% but projects of this nature are usually judged by a risk adjusted rate that is 5% higher than cost of capital. (Points : 3)        about $8.52 million
       about $8.00 million
       about $7.52 million
       none of the above

Explanation / Answer

25. the projects under consideration have different risk characteristics

In general, the risk-adjusted discount rate approach is considered preferable to the weighted cost of capital approach when the projects under consideration differ significantly in their risk characteristics

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