Yatta Net International has manufacturing, distribution, retail, and consulting divisions. Projects undertaken by the manufacturing and distribution divisions tend to be low-risk projects, because these divisions are well established and have predictable demand. The company started its retail and consulting divisions within the last year, and it is unknown if these divisions will be profitable. The company knew that opening these new divisions would be risky, but its management believes the divisions have the potential to be extremely profitable under favorable market conditions. The company is currently using its WACC to evaluate new projects for all divisions.

If Yatta Net International does not risk-adjust its discount rate for specific projects properly, which of the following is likely to occur over time?

a. The firm will reject too many relatively safe projects.
b. The firm will become less risky.
c. The firm will make poor capital budgeting decisions that could jeopardize the long-run viability of the company.

Risk adjusted discount rate is very important for any business because it tells you the legitimate return on your investments with correlation to your risk.

Whenever there is a chance of any investment being risky, we use the risk adjusted discount rate to know how much we are exposed to the levels of risk and what could our potential return on investment be.

Hope I made myself clear.

Thanks buddy.