hard · Principles of Finance

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:

1. Biased upward, potentially leading to the acceptance of a value-destroying project.
2. Biased downward, as the cash flows are not properly discounted for growth.
3. More accurate, because it uses the firm's actual historical cost of funds.
4. Unchanged, as the internal rate of return remains the same.

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