compute the NPV of all its potential capital budgeting projects

Suppose a firm uses a single discount rate to compute the NPV of all its potential capital budgeting projects, even though the projects have a wide range of nondiversifiable risk. The firm then undertakes all these projects that appear to have positive NPVs. Can you explain why such a firm would tend to become riskier over time?

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Answer Excerpt

Suppose a firm uses a single discount rate to compute the NPV of all its potential capital budgeting projects, even though the projects have a wide range of nondiversifiable risk. The firm then undertakes all these projects that appear to have positive NPVs. Can you explain why such a firm would tend to become riskier […]



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