Question

Global Spice Co. is considering a new project, but all methods for assessing risk indicate that the project's risk is greater than the risk of the firm's average project. In evaluating this project, it would be reasonable for Global Spice's management to do which of the following?

A) Increase the estimated NPV of the project to reflect it's greater risk.
B) Increase the estimated IRR of the project to reflect it's greater risk.
C) Incraese the cost of capital used to evaluate the project to reflect it's higher-than average risk
D) Reject the project, as its acceptance would increase the firm's risk
E) Ignore the risk differntial if the project would amount to only a small fraction of the firm's total assets.

Answer 1

Answer: In evaluating this project, it would be reasonable for Global Spice's management to ,Increase the cost of capital used to evaluate the project to reflect its higher-than-average risk.

Here, in this case the Global Spice Co. is considering a new project, they require a methods for assessing risk where the project's risk is greater than the risk of the firm's average project.

Therefore in this case the correct option is (c).