Mutually exclusive projects with different risk levels

When comparing mutually exclusive projects with different risk levels and discount rates, what discount rate should we use to discount the differential cash flows?

a. The higher of the two discount rates b. The lower of the two discount rates c. An average of the two discount rates d. None of the above Explain your answer.

Illustration 6.2: Differential Cash Flows - NPV and IRR

Consider again the phone systems analyzed in illustration 6.1. The differential cash flows can be estimated as shown in Figure 6.3:

Figure 6.3: Cash Flows on Phone Systems Vendor 1: Less Expensive System

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