Economics Capital Budgeting Questions
The impact of project risk on capital budgeting decisions is that it influences the evaluation and selection of investment projects. Higher project risk typically leads to a higher required rate of return or discount rate, which in turn reduces the present value of future cash flows. This means that projects with higher risk may be less attractive and may be rejected in favor of projects with lower risk. Additionally, project risk affects the decision-making process by increasing the importance of risk analysis and management techniques, such as sensitivity analysis, scenario analysis, and Monte Carlo simulation, in order to assess and mitigate the potential risks associated with the investment project.