Risk levels are incorporated into potential investments by using discount rates for the level of risk associated
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Risk levels are incorporated into potential investments by using discount rates for the level of risk associated with the specific investment Smart & Zutter, The riskier the investment, the higher the discount rate provided which can lower the overall NPV Smart & Zutter, However, depending on the cash flows that can be estimated, companies may assign the same discount rate to each investment to find a base analysis to determine which investment might be the best one to select Smart & Zutter, As long as the risk is accounted for with a discount rate, companies will have the options of selecting from multiple investments or if their finances warrant it choosing multiple investments that will provide a higher overall NPV Internal rate of return IRR is also a discount rate that allows for the NPV to equal $Smart & Zutter,
As with the NPV the higher the risk, the higher the discount rate or IRR Smart & Zutter, If the IRR is higher than the firm\'s required rate of return, then the company has an option that will improve its value Smart & Zutter, Typically, the NPV and IRR can each determine what investments may or may not be profitable. However, their figures will not always point to the same investment, so managers and executives should look at all the options available to make the best decision that will benefit the company, the shareholders, and their stakeholders.
Do you agree or disagree with the following thoughts? Why or why not?
Related Book For
Valuation The Art and Science of Corporate Investment Decisions
ISBN: 978-0133479522
3rd edition
Authors: Sheridan Titman, John D. Martin
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