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Project Risk Analysis

Please discuss the following:
a. How is project risk incorporated into a capital budgeting analysis?
b. Suppose that two mutually exclusive projects are being evaluated on the basis of cash posts. How would risk adjustments be applied in this situation?

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a. How is project risk incorporated into a capital budgeting analysis?
The project risk is primarily incorporated in the form of higher or lower discount rates that are used to evaluate a capital budgeting analysis. In a capital budgeting analysis, the expected future cash flows are discounted to the present value terms to compare on the same platform with the initial investment. To be discounted, a discount rate needs to be used which is usually the cost of capital of the firm. This discount rate is adjusted for the ...

Solution Summary

This solution provides a discussion on the two project risk questions proposed. This solution is comprised of about 350 words.

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