medium · 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, since cash flows aren't discounted to reflect growth.
- More accurate, since it directly uses the firm's actual historical cost of funds raised.
- Unchanged, because the project's internal rate of return stays fixed regardless of hurdle rate.
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