If a firm uses its WACC as the discount rate for all of the projects it undertakes, then the firm will tend to become riskier over time.

Question

Quizplus · Accepted Answer

Using the Weighted Average Cost of Capital (WACC) as a universal discount rate ignores the varying risk profiles of different projects. Projects with higher risk than the firm's average will appear more attractive, leading to a riskier portfolio over time.

If a Firm Uses Its WACC as the Discount Rate