Assumptions of capital Budgeting under risk: The discussion on capital budgeting under risky situations is based upon the

following assumptions: 1. That the firm is not having any capital rationing, and no profitable project will be rejected for want of funds. 2. That the proposals net investment is known with certainty. 3. Each set of cash flows is known with certainty, and is mutually exclusive and exhaustive. 4. The required rate of return of the firm is given and is indicative of the risk-return characteristics of the proposal. b) 5. The firm is basically risk-averse. This assumption is important as it implies that the finance manager will not accept a risky proposal unless its expected profits are sufficient to compensate for the risk. The risk aversion also means that the additional risk will be accepted only if it results in disproportionately larger increase in expected returns.