hard · Principles of Finance capital-budgeting
An analyst correctly observes that a project has a higher β than the firm's average. If she fails to adjust the hurdle rate upward, the resulting NPV will be:
- Biased upward, potentially leading to the acceptance of a value-destroying project.
- Biased downward, as the cash flows are not properly discounted for growth.
- More accurate, because it uses the firm's actual historical cost of funds.
- Unchanged, as the internal rate of return remains the same.
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