Question

if the risk of an investment project has a beta of 1:

a- projects initial cost should be increased/ decreased to account for the increase/ decrease in risk.

b- projects discount rate must not be adjusted based on the risks of the projects cash flows.

c- projects discount rate must be adjusted based on the sources of project financing.

d- average rate used for all prior projects should be used as the new projects discount rate.

e- market rate of return should be used as the projects discount rate.

Answer #1

when the risk of an investment project has a beta of 1, it will mean that the risk of the investment project will be similar to that of the market, and the market rate of return can be used as the discounting rate in order to find out the the value of cash flows of the project

When there is a beta of 1 related to an investment project risk, it will mean that the discount rate will be similar to that of the market as it will fluctuate in similar proportion to the market rate of return, so it can be said that the market rate of return can be used as a Project discount rate.

All the other options are not true because they are adjusting the product discount rate.

Correct answer would be option (e)market rate of return should be used as project discount rate.

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