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Challenges in advanced management accounting
Challenges in advanced management accounting

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4.2 Simple adjustments to deal with increased risk

Dealing with risk can be relatively simple: the techniques below are quick ways to incorporate some understanding of the risk of a project into the project appraisal. While they are not the most sophisticated methods available, they benefit from being easy to understand and implement, and are certainly better than making no adjustment for risk. The following subsections discuss how the discount rate and payback period can be adjusted, and clarify that the discount rate does not need to be adjusted for cash flows which occur further in the future, if the discount rate is used appropriately to calculate a discount factor for each year.