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Concept of Risk in the Capital Budgeting Process

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Question: Explain how the concept of risk can be incorporated into the capital budgeting process.

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The concept of risk is incorporated into the capital budgeting process by requiring projects to achieve hurdle rates that give the appropriate return on capital employed. The required rate of return (or cost of capital) should reflect the relevant risk of the project. The process of incorporating risk into capital budgeting is to make particularly risky ...

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