Suppose risk st contest salle de sport free rate is 10 and compensation of investment risk is 5, then a rate of 15 will be use for discount cash flow.
Risk adjusted rate has a good deal of intuitive appeal in the eyes of risk averse business person.
For long-term projects, there is also uncertainty relating to future market conditions, profitability of the investment and inflation levels.
When the discount rate was adjusted to reflect the extra risk of the project, it revealed that the project should not be taken because win a free laptop in india the value of the cash inflows does not exceed the cash outflow.However, as just noted, it is difficult to arrive at an appropriate risk premium, which can render the results of the analysis invalid.Because the present value of the future cash is greater than the current cash outflow, the project will result in a net cash inflow, and the project should be accepted.Therefore, the project should not be undertaken.What is the definition of risk adjusted discount rate?It is generally calculated as a sum of risk free rate and risk premium.
The risk premium is derived from the perceived level of risk associated with a stream of cash flows for which the discount rate will be used to arrive at a net present value.
For this reason, the discount rate is adjusted to 8, meaning that the company believes a project with a similar risk profile will yield an 8 return.However, the outcome may change as a result of adjusting the discount rate to reflect risks.The required return on risk-free investments, and the market premium,.e.Under capm or capital asset pricing model, risk premium (Market rate of return - Risk free rate) x beta of the project.A very common example of risky investment is the real estate.