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Describe a procedure firms can use to establish costs of capital for projects with differing degrees...

Describe a procedure firms can use to establish costs of capital for projects with differing degrees of risk.

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The most common method of analyzing the project is the net present value method. This is a popular capital budgeting technique whereby the future cash flows expected from project are discounted at a particular rate of interest. This rate of interest is generally the cost of capital of funds. In general the cost of capital for a firm is the same. However when there are projects of different risks involved, the cost of capital has to be adjusted for incorporating the risk of different projects. The cost of capital of the risky project is higher while a cost of capital offer less risky project is lower. This ensures that the projects are assessed according to their risk involved.

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