5 Questions
What is the relationship between risk and the attractiveness of an investment?
As risk increases, the investment becomes less attractive due to heightened uncertainty and potential for loss.
How does higher risk typically affect the net present value (NPV) of a project?
Higher risk leads to a lower NPV as future cash flows become less certain and subject to higher discount rates.
What is the effect of increased risk on the cost of capital?
The cost of capital increases as investors demand higher returns to compensate for increased risk.
How does increased risk affect the discount rate used to evaluate a project?
The discount rate increases to reflect the heightened uncertainty and potential volatility.
Which of the following statements is true regarding the financial dynamics of a project with higher risk?
Higher risk leads to a lower NPV, higher cost of capital, and higher discount rate.
Explore how the level of risk affects a project's financial dynamics. Learn why as risk increases, investments become less attractive, leading to a lower net present value and higher cost of capital. Understand the relationship between risk and uncertain future cash flows.
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