A firm is considering the purchase of an asset whose stand-alone risk

Question

A firm is considering the purchase of an asset whose stand-alone risk is greater than the average risk of its existing portfolio of assets. In evaluating this asset, the decision maker should:

a. increase the internal rate of return (IRR) used to evaluate the asset to reflect its higher risk.

b. increase the asset's net present value (NPV) to reflect its higher risk.

c. reject the asset because its acceptance would clearly decrease the value of the firm.

d. ignore the asset's higher risk if, after purchase, it will make up only a small fraction of the firm's total assets.

e. increase the required rate of return that is used to evaluate the asset to reflect its higher risk.

Answer

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