Capital Budgeting And Risk Introduction - Financial Management

We discussed the nature of risk and its influence on financial decision making. The greater the risk associated with an investment, the greater the return required. This basic principle also applies in the capital budgeting area. In the previous chapter, investment projects were evaluated using the firm’s weighted cost of capital (required rate of return). This approach implicitly assumes that all projects being considered are of equal risk and that this risk is the same as that for the firm as a whole.When a project has more or less than an average risk level, it is necessary to adjust the analysis to account for this risk level.

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Financial Management Topics