Risk-adjusted discount rate
Risk-adjusted discount rate is a rate that incorporates the risk of the project's cash flows. The cost of capital to the firm reflects the average risk of the firm's existing projects. Thus, new projects that are riskier than existing projects should have a higher risk-adjusted discount rate. Conversely, projects with less risk should have a lower risk-adjusted discount rate.
Definitions
According to Financial Management Theory and Practice by Eugene F. Brigham and Michael C. Ehrhardt (13th edition),
- Risk-adjusted discount rate. Incorporates the risk of the project's cash flows. The cost of capital to the firm reflects the average risk of the firm's existing projects. Thus, new projects that are riskier than existing projects should have a higher risk-adjusted discount rate. Conversely, projects with less risk should have a lower risk-adjusted discount rate.
Related concepts
- Financial management. A combination of enterprise efforts undertaken in order to procure and utilize monetary resources of the enterprise.
