If the new project is less risky its cost of capital

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Unformatted text preview: aising one more dollar in the context of all the company's projects considered altogether, not just the project being evaluated. We can adjust the average cost of capital of the company to suit the perceived risk of the project: • If a new project being considered is riskier than the average project of the company, the cost of capital of the new project is greater than the average cost of capital. • If the new project is less risky, its cost of capital is less than the average cost of capital. • If the project is as risky as the average project of the company, the new project's cost of capital is equal to the average cost of capital. As you can tell, altering the company's cost of capital to reflect a project's cost of capital requires judgment. How much do we adjust it. If the project is riskier than the typical project do we add 2 percent? 4 percent? 10 percent? There is no prescription here. It depends on the judgment and experience of the decision maker. But this is where we can use the measures o...
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This note was uploaded on 02/07/2014 for the course MIS 304 taught by Professor Mejias during the Spring '07 term at University of Arizona- Tucson.

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