Under normal circumstances, the weighted average cost of capital (WACC) is used as the firm's required rate of return because:

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The weighted average cost of capital (WACC) is used as the firm's required rate of return because, as long as the firm's investments earn returns greater than its WACC, the value of the firm will not decrease. In other words, the WACC represents the average return the firm must earn to satisfy all its sources of financing and maintain its current value. If the returns on the firm's investments are less than the WACC, the firm is not generating enough value to cover its financing costs, and its value will decrease. Therefore, the WACC is a critical metric for assessing the value-creating potential of a firm's investments.

Under Normal Circumstances, the Weighted Average Cost of Capital (WACC)