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What would happen to the firm's risk if it chose all projects bsaed on a single discount rate (WACC)?

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If a firm uses a single discount rate, their WACC, to compute the NPV of all capital projects, even though they have a wide range of non-diversifiable risk. The firm selects projects with positive NPV's. What would this policy do to the firm's risk over time?

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Solution Summary

This solution discusses the effect of the firm's policy to use WACC to discount all projects on the level of risk the firm has over time in 170 words.

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This policy will in general increase the firm's risk over time. This is because of the following reason.

If a firm just uses one discount rate, then two things would happen:
- They will be "accepting" higher risk projects. This is ...

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