In the preceding chapter, the capital budgeting techniques assumed the flow of cash with certainty meaning that the uncertainty or risk was not considered. Even if the risk was present, it was assumed that all the different capital projects had the same level of risk. However, in practice, risk in cash flow differs from one project to the other. And so, the risk factor needs to be incorporated in the capital budgeting analysis. The concept of risk and its measurement have already been discussed in Chapter 3. So, at this place, it is only the application of risk factor in the capital budgeting process that will be discussed.

6.4.1 Inclusion of Risk Factor in Cash Flow

There are two ways to incorporate the risk factor ...

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