1.A firm uses a single discount rate to compute the NPV of all its pot

QUESTION

1.A firm uses a single discount rate to compute the NPV of all its potential capital budgeting projects, even though the projects have a wide range of nondiversifiable risk. The firm then undertakes all those projects that appear to have positive NPVs. Briefly explain why such a firm would tend to b
First let us under stand what is NPV . It is one pf capital budgeting technique it means that “It is the process of evaluating and selecting long term investments that are consistent with the goal of share holders wealth maximastion ” IN CAPITAL BUDGETING there are two type of techniques discount cash flow and non discount cash flow . In NPV 1. It is going consider time factor in to consideration . 2.It will consider risk factor i.e. discount factor in to account NPV has following advantages .nt factor means time fact it will take time into consideration . 2.As we

know that discount factor means risk . 3.risk cannot be eliminated has risk from investment . every investment has risk . 4.In NPV it is going to tell by what time our investment will be back . 5.Even though it was single discount factor sppose it was higher rate than we are sure about our return .as it was said that it was postive NPV it means we get return on our investmen . _

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