You have just assessed a project involving an immediate cash outflow followed by a series of cash inflows over the next seven years by calculating the NPV and the IRR. You now discover that you have underestimated the discount rate. Using the correct, higher discount rate will have the following effects, relative your original NPV and IRR results:
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
You have just assessed a project involving an immediate
You now discover that you have underestimated the discount rate. Using the correct, higher discount rate will have the following effects, relative your original NPV and IRR results:
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