Question
In capital budgeting, the discount rate used in the net
present value method is also known as:Solution
The discount rate used in the net present value (NPV) method represents the rate of return required by an investor to invest in a particular project. It takes into account the opportunity cost of capital and the risk associated with the project. This rate is also known as the required rate of return or hurdle rate. The weighted average cost of capital (WACC) is the average cost of all the sources of capital used by the company. The capital asset pricing model (CAPM) is used to calculate the expected return of an asset based on its risk level. Systematic risk is the risk that cannot be diversified away, while unsystematic risk is the risk that can be diversified away.
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