Question

A firm is considering the purchase of an asset whose risk is lower than the current...

A firm is considering the purchase of an asset whose risk is lower than the current risk of the firm, based on any method for assessing risk. In evaluating this asset, the decision maker should

Question 7 options:

Increase the IRR of the asset to reflect the greater risk.

Lower the cost of capital used to evaluate the project to reflect the lower risk of the project.

Reject the asset, since its acceptance would increase the risk of the firm.

Ignore the risk differential if the asset to be accepted would comprise only a small fraction of the total assets of the firm.

Increase the cost of capital used to evaluate the project to reflect the higher risk of the project.
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Answer #1

If the company is trying to purchase asset whose risk is lower than the current risk of the firm, then it should be better to decrease the cost of capital in order to discount that project to arrive at the net present value because when there would be lower risk, then risk adjusted weighted average cost of capital would be lower and then the net present value of that project is be higher than the other projects because of lower capital cost.

All the other statement are false.

Correct answer will be option (B)lower the cost of capital used to evaluate the project to reflect the lower risk of the project

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