If a firm uses its WACC as the discount rate for all of the projects it undertakes, then the firm will tend to accept some negative net present value projects.

Question

Quizplus · Accepted Answer

Using the WACC as the discount rate for all projects ignores the fact that different projects have different levels of risk. Projects with higher risk than the firm's average should have a higher discount rate, and using the WACC could lead to accepting projects that actually destroy value (i.e., have a negative NPV).

If a Firm Uses Its WACC as the Discount Rate