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A medical group practice is considering offering a new service with risk that is greater than the current risk of the business. When evaluating this investment, the decision maker should:

a. increase the internal rate of return of the project to reflect the greater risk
b. increase the net present value of the project to reflect the greater risk
c. reject the project because its acceptance would increase the risk of the business
d. ignore the risk differential if the project represents only a small fraction of the total assets of the firm
e. increase the cost of capital applied to the project to make it higher than the business's corporate cost of capital

Respuesta :

Answer:

e. increase the cost of capital applied to the project to make it higher than the business's corporate cost of capital

Explanation:

When a project is more risky compared to the current risk of the business, the business shouldn't use the company's weighted average cost of capital but use a cost of capital higher than the company's wacc to reflect the riskiness of the project. .

Net present value is the present value of after tax cash flows from an investment less the amount invested.

Internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested

NPV and IRR are determined by amount invested in the project, cost of capital and cash inflows. It cannot be randomly manipulated.

I hope my answer helps you

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