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 (desired rate of return) 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.
Answer (A) is incorrect because The nature of the funding may not be a sufficient reason to use a risk-adjusted rate. The type of funding is just one factor affecting the risk of a project.
Answer (B) is incorrect because A higher hurdle will result in rejection of more projects.
Answer (C) is incorrect because A risk-adjusted high hurdle rate is used for capital investments with greater risk.
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