Our company’s policy is to use 12%, which is our cost of capital, as the discount rate for NPV calculations on all projects considered for investment.What is wrong with this policy?

The policy outlined in the corporation’s manual is potentially incorrect as it does not take into account the particular risk associated with each project being considered for investment. The cost of capital is an important measure to use when evaluating potential investments, however it should only be used as a baseline and not a one-size-fits-all approach.

Every project or venture has its own unique set of risks that need to be taken into consideration when calculating the Net Present Value (NPV). For this reason, different discount rates must be applied depending on factors like the amount of uncertainty associated with the cash flows generated by the investment; the rate of return required by investors relative to their level of risk tolerance; and any external influences such as current market conditions and political/economic climate.

Therefore, it would not be prudent for a company to rely solely on their cost of capital when making investment decisions as there could be more beneficial opportunities available that may require higher rates of return. Taking all relevant factors into account will allow corporations to make informed decisions and maximize returns while minimizing costs.