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NPV and discount rate

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A firm uses a single discount rate to compute the NPV of all its potential capital budgeting projects, even though the projects have a wide range of nondiversifiable risk. The firm then undertakes all those projects that appear to have positive NPV's. Briefly explain why such a firm would tend to become riskier over time.

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The response discusses the NPV and discount rate.

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Capital budgeting involves taking decisions about the long term assets mix of the organization. Capital budgeting decision is surrounded by risk factors. Risk in capital budgeting may be defined as the variation of actual cash flows from the expected cash flows. (Resources, 2010)

Using single discount rate

Each capital budgeting project has ...

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