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A riskier project is normally evaluated at a

  • A.rate equal to the inflation rate
  • B.rate of zero
  • C.higher discount rate
  • D.lower discount rate

Answer: C

Adding a risk premium to the discount rate penalises distant and uncertain cash flows more heavily, so the project must promise more to be accepted. Adjusting the cash flows instead, by expected values, is the alternative treatment.

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