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.

Question

Quizplus · Accepted Answer

To calculate the NPV of a project, the project's cash flows should be discounted at the WACC. Therefore, an accurate WACC is vital to make a proper investment decision. A lower WACC will result in a higher NPV, while a higher WACC will lead to a lower NPV. An accurate WACC also reflects the cost of capital involved in financing the project. Options A, B, D, and E are incorrect as the coupon rate, discount rate for future projects, return to shareholders, and maintaining firm value are not solely dependent on the project's WACC.

Why Is an Accurate WACC So Important When Evaluating a New