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

This is because the WACC is the minimum rate of return that a project must generate in order to create shareholder value. Therefore, if the WACC is used as the discount rate for all projects, some projects with a negative net present value (NPV) may still be accepted if the NPV is greater than zero but less than the WACC. This can lead to value destruction for the firm.

If a ﬁRm Uses Its WACC as the Discount Rate