Questions:
1. Which of these projects is likely to have the higher asset beta, other things equal? Why?
a. The sales force for project A is paid a fixed annual salary. Project B's sales force is paid by commissions only.
b. Project C is a first-class-only airline. Project D is a well-established line of breakfast cereals.
2. True or false?
a. The company cost of capital is the correct discount rate for all projects, because the high risks of some projects are offset by the low risk of other projects.
b. Distant cash flows are riskier than near-term cash flows. Therefore long-term projects require higher risk-adjusted discount rates.
c. Adding fudge factors to discount rates undervalues long-lived projects compared with quick-payoff projects.