Question

why is it incorrect to use the same discount rate for different sectors of investment?

Answer 1

Discount rate can act as a hurdle rate and represents the minimum return which should be obtained to get non negative net present value.

Different investments have different risk profiles. While discounting cash flows from securities backed by government, the risk free rate may be appropriate but if a company is trying to invest in a new project, then it may be appropriate to use the weighted average cost of capital for the company. Also, as different projects and investments can have different risk, the discount rate should reflect it and thus, it would vary. The higher the risk the higher would be the discount rate.

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