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ADJUSTMENT OF RISK AND UNCERTAINTY IN CAPITAL BUDGETING DECISION
What is risk in the context of capital budgeting decisions?
Risk refers to the variability of actual returns from expected returns on a capital investment. It arises because future cash flows cannot be predicted with certainty.
What is the main objective of adjusting risk in capital budgeting decisions?
To account for uncertainty and obtain a realistic project value.
How does uncertainty differ from risk in capital budgeting?
Risk involves situations where probabilities can be assigned to possible outcomes, while uncertainty refers to situations where even the probabilities of outcomes are unknown. Uncertainty is a higher level of unpredictability than risk.
What does a certainty equivalent coefficient less than 1 indicate?
The project's cash flows carry some degree of risk.
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