Unformatted text preview: kier
risk-adjusted discount rates.
risk-adjusted Calculate NPV using the new riskadjusted discount rate. Risk-Adjusted Discount Rate
n NPV = Σ t=1 ACFt
t - IO
(1 + k*)
(1 k* Risk-Adjusted Discount Rate How do we determine the
appropriate risk-adjusted discount
rate (k*) to use?
(k*) Many firms set up risk classes to
categorize different types of
projects. Risk Classes
24% Project Type
Expand current business
Related new products
Unrelated new products
Research & Development Summary: Risk and
You can adjust your capital budgeting
methods for projects having different levels
of risk by:
of Adjusting the discount rate used (riskAdjusting
adjusted discount rate method), Measuring the project’s systematic risk, Computer simulation methods, Scenario analysis, Sensitivity analysis....
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