Economics · Capital Budgeting
When evaluating a new project using the NPV method, a firm's current Weighted Average Cost of Capital (WACC) should be adjusted for which of the following factors to be a theoretically correct discount rate?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The depreciation charge related to the new project's non-current assets, as this impacts the cash flow available for distribution.
- 2The specific business risk and the specific financial risk of the new project, if different from the existing average company risks.✓
- 3The historical profitability of the new project's division, to account for management bias.
- 4The level of retained earnings available, as this represents the cheapest form of finance.
Correct answer
The specific business risk and the specific financial risk of the new project, if different from the existing average company risks.
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