Why is an accurate WACC so important when evaluating a new project? Assume a negative cash outflow at Time 0 and positive project cash flows thereafter.

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Quizplus · Accepted Answer

An accurate WACC is essential when evaluating a new project because it is used as the discount rate to calculate the project's net present value (NPV). The project's accept/reject decision is ultimately based on the NPV, which determines whether the project generates more value than the initial cash outflow at Time 0. Additionally, the coupon rate on new bonds issued to fund the project may be set equal to the WACC, and the WACC may also serve as a limit to the return to shareholders. However, these factors are not as directly tied to the project's evaluation and decision-making process as the NPV calculation. Therefore, choice C is the most appropriate.

Why Is an Accurate WACC So Important When Evaluating a New