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What are the consequences of using a single discount rate for all divisions?
Solution
Using a single discount rate would underestimate the risk of a riskier division leading to its
acceptance. On the other hand the lesser risky ventures could be eliminated on account of a
higher discount rate. In total the firm would become riskier with lower expected NPVs.

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What are the consequences of using a single discount rate for all di.pdf

  • 1. What are the consequences of using a single discount rate for all divisions? Solution Using a single discount rate would underestimate the risk of a riskier division leading to its acceptance. On the other hand the lesser risky ventures could be eliminated on account of a higher discount rate. In total the firm would become riskier with lower expected NPVs.