Certain types of projects are inherently more or less risky than other. The firm can use past experience and information from audits of earlier projects to create risk classes or categories for different types of capital budgeting projects. The findings from break-even, scenario, sensitivity, or simulation analysis also can be used to determine risk categories for projects. Each risk category can be given a generic description to indicate the types of projects it should include and a risk-adjusted discount rate or project cost of capital to assign those projects. An example is shown is Table A. Subjectivity enters this process as management must decide the number of categories, the description of each risk category, and the required rate of return to assign each category. Differences of opinion or internal firm politics may lead to controversy in classifying a project. Clearly defined category descriptions can minimize such problems. The process of setting up the risk categories can be made less subjective if the firm audits ongoing and completed capital budgeting projects. Audits can provide fairly objective written records of the firm’s experiences with different categories of projects. This paper analysis trail can be used to justify the classifications given to different kinds of projects, as well as the risk premiums assigned to different risk classes.