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Hello sir.I have a question about risk.This Question is from Kaplan Revision
The lower risk of a project can be recognised by increasing which of the following?
A The cost of the initial investment of the project
B The estimates of future cash inflows from the project
C The internal rate of return of the project
D The required rate of return of the projectThe answer is option B. But I couldn’t understand why. If the risk is high, shouldn’t the return be high?
It is a rather poor question from Kaplan.
However, the lower the risk then the ‘happier’ we will be to go ahead with the project. Increasing the estimates of future cash flows will result in a higher NPV which will make us more likely go go ahead with the project.
Again, it is a rather poor question because usually (whatever the risk) we will make our best estimates of the future cash flows, and if there is lower risk we might discount at a lower required return.
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