Cash flows
Life of the proposal
Rate of discount
Salvage value
Answer is Right!
Answer is Wrong!
The correct answer is C. Rate of discount.
The risk-adjusted discount rate (RADR) method is a capital budgeting technique that takes into account the risk of a project when calculating its net present value (NPV). The RADR is calculated by adding a risk premium to the risk-free rate of return. The risk premium is a percentage that reflects the additional risk of the project.
The RADR is then used to discount the project’s cash flows. This results in a lower NPV for riskier projects. The RADR method is a more accurate way to evaluate the NPV of a project than the traditional NPV method, which does not take into account risk.
The other options are incorrect because:
- Option A: Cash flows are not adjusted in the RADR method. The cash flows are discounted at the RADR, which is a rate that reflects the risk of the project.
- Option B: The life of the proposal is not adjusted in the RADR method. The life of the proposal is used to calculate the project’s NPV, but the RADR is not affected by the life of the proposal.
- Option D: Salvage value is not adjusted in the RADR method. Salvage value is used to calculate the project’s NPV, but the RADR is not affected by the salvage value.