A corporation’s policy manual states: Our company’s policy is to use 12%, which is our cost of capital, as the discount rate for NPV…

A corporation’s policy manual states: “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.”

1. What is wrong with this policy?

2. In what types of projects will this company overinvest?

3. In what types of projects will it underinvest?

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