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Which is a firm ability to meet its financial obligations

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In capital budgeting decisions, the risk can also be associated with an individual project. For example, project A may be riskier than Project B. That is a firm can face different types of risks such as:

  • Financial risk, which is a firm's ability to meet its financial obligations,
  • Business risk, for example, chances of a major shift in the industry, and/or technology in the future (electric and driverless cars!), and
  • Project specific risk, for example, introducing a new product (not yet tested in the market) versus enhancing an existing product or implementing a major business transformation for cost reduction (efficiency).

Given these different types of risks do you think it is appropriate to use a single cost of capital, for example, WACC (Weighted Cost of Capital) to evaluate firm's all capital projects for decision making? Or the firm should use multiple "cost of capital" rates according to different risk levels? Please discuss.

Reference no: EM132466998

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