Question

A bakery company is considering one capital budgeting project involving the replacement of a sophisticated brick​ oven, and another capital budgeting project involving research and development into synthetic food substitutes. Which of the following statements is MOST correct concerning the riskminusadjusted discount​ rate(s) for the​ projects?

A. The rate should be the same for both projects because they are being considered by one company with the same common shareholders.
B. The rate should be higher for the replacement project because the company is more certain of the returns from a project similar to their existing business.
C. The rate will likely be higher for the replacement project because the likelihood of success is higher.
D. The rate will likely be higher for the research and development project because of the uncertainty involved with research and development projects.

Answer 1

D. The rate will likely be higher for the research and development project because of the uncertainty involved with research and development projects.