Explain risk adjusted discount rate method, Financial Management

Q. Explain Risk Adjusted Discount Rate Method?

In the risk adjusted discount rate method the future cash flow from capital projects are discount at the hazard adjusted discount rate and decision regarding the selection of a project is made on the basis of the net present worth of the project computed at the risk adjusted discount rate. The risk attuned discount rate is based on the assumption that investors expect a higher rate of return on more perilous projects and a lower rate of return on less risky projects and so a higher discount rate is utilized for discounting the cash flows of more risky project and a lower discount rate is used for discounting the cash flows of less risky project.

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