Do firms adjust the cost of capital to account for projects thatare more risky than...

Do firms adjust the cost of capital to account for projects that are more risky than average? How will this affect NPV? If there is an effect, would it be direct or inverse?

Expert Solution

Yes, the firms adjust the cost of capital to account for projects that are more risky than average. The cost of capital is increased for the projects that are more risky than average projects.

The NPV of the risky projects with a higher cost of capital would decrease.

In other words, an increase in cost of capital has an inverse effect on the NPV.

Higher the cost of capital lower will be the NPV and vice versa.

jeff jeffy answered 2 years ago

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