A. The company may accept some projects with IRRs less than its cost of capital.

B. All of the statements are correct. When we analyze risk, we are measuring the amount of variability that could take place in the future returns from the investment being considered. One way of accounting for the anticipated amount of risk in a capital budgeting analysis is to use a required rate of return to discount the cash flows that is either higher or lower than the company's cost of capital. If the project is considered to be riskier than the firm's existing business (there is more variability in the possible future cash flows), a higher required rate of return is used to discount the future cash flows. If the project is considered to be less risky than the firm's existing business, a lower required rate of return is used to discount the future cash flows. This is called a "risk-adjusted rate of return."  Mega may accept some investments with internal rates of return less than Mega's overall average cost of capital because the investment may be considered to be less risky than the firm's other business, and thus a lower required rate of return (i.e., hurdle rate) was used to discount its expected future cash flows. Discount rates vary depending on the type of investment because a higher discount rate would be used to discount a riskier investment and a lower discount rate would be used to discount a less risky investment. Mega may reject some investments with internal rates of return greater than the cost of capital because those investments were judged to be riskier than the firm's existing business and therefore the expected future cash flows have been discounted at a rate higher than the firm's cost of capital. For a riskier investment using a risk-adjusted discount rate, the expected cash flow from the investment will need to be relatively larger, or the increased discount rate will generate a negative net present value. So even though the investments' IRRs are greater than the cost of capital, if they are not greater than the higher required rate of return, the investments will be rejected. Discount rates may vary depending on the division because the same investments undertaken by different organizational subunits may carry different levels of risk due to risk factors that could be specific to one unit and not to another unit.

C. 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.

D. 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.