Answer (D) is correct . Risk analysis attempts to measure the likelihood of the variability of future returns from the proposed investment. Risk can be incorporated into capital budgeting decisions in a number of ways, one of which is to use a hurdle rate higher than the firm’s cost of capital, that is, a risk-adjusted discount rate. This technique adjusts the interest rate used for discounting upward as an investment becomes riskier. The expected flow from the investment must be relatively larger, or the increased discount rate will generate a negative net present value, and the proposed acquisition will be rejected. Accordingly, the IRR (the rate at which the NPV is zero) for a rejected investment may exceed the cost of capital when the risk-adjusted rate is higher than the IRR. Conversely, the IRR for an accepted investment may be less than the cost of capital when the risk-adjusted rate is less than the IRR. In this case, the investment presumably has very little risk. Furthermore, risk-adjusted rates may also reflect the differing degrees of risk, not only among investments, but by the same investments undertaken by different organizational subunits.
Answer (A) is incorrect because Discount rates may vary with the project or with the subunit of the organization.
Answer (B) is incorrect because The company may accept some projects with IRRs less than the cost of capital or reject some project with IRRs greater than the cost of capital.
Answer (C) is incorrect because The company may accept some projects with IRRs less than the cost of capital or reject some project with IRRs greater than the cost of capital.
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Which of the above statements are correct?