Asked by Rebecca Groen on Jul 04, 2024
Verified
When a firm uses the subjective approach to assign discount rates to projects, the firm risks rejecting projects which should have been accepted.
Subjective Approach
A decision-making process based on personal opinions, interpretations, points of view, emotions, and judgment.
Discount Rates
The interest rate used to discount future cash flows to present value, often reflective of the risk associated with the cash flows.
- Examine the personal bias in setting discount rates and its effects on choosing projects.
Verified Answer
MR
maddy riveraJul 09, 2024
Final Answer :
True
Explanation :
Using the subjective approach for assigning discount rates can lead to inaccuracies in evaluating a project's value, potentially causing a firm to reject profitable projects due to overestimation of risks or underestimation of returns.
Learning Objectives
- Examine the personal bias in setting discount rates and its effects on choosing projects.
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