Final answer:
The statement is true as the discount rate should match the expected return of an asset with comparable risk. Risk reflects the uncertainty of returns, influencing the discount rate alongside the opportunity cost of capital and risk premium. An investment's risk and expected return guide the determination of an appropriate discount rate.
Step-by-step explanation:
The statement that the correct discount rate on a project should be the expected return on a financial asset of comparable risk is indeed true. The expected rate of return is an essential concept in finance, which gauges how much one might anticipate earning from an investment, considering interest payments, capital gains, or increased profitability, typically expressed as a percentage. Meanwhile, risk involves the probability that the actual returns will deviate from those that are expected, with high-risk investments showing greater variability in returns over time.
For an investor, the discount rate for a project must reflect both the opportunity cost of capital and the risk premium associated with the project's level of risk. This is because investors expect to be compensated for the risk they take, with higher potential returns for higher risks. Thus, a financial asset with a similar risk profile should have an expected rate of return that serves as a benchmark for setting the discount rate.
When a financial investor determines the appropriate discount rate, such as deciding on a 15% interest rate for future payments as the example suggests, they factor in other available financial investment opportunities and add a premium for additional risk, if any.