A proposed project has a positive NPV when evaluated at the company cost of capital.If the firm employs debt in its capital structure, will the project remain acceptable after evaluation with the WACC?

Question

Quizplus · Accepted Answer

Using the WACC, which includes the cost of debt in addition to the cost of equity, will increase the discount rate used to evaluate the project. This will result in a lower present value of future cash flows, but since the project had a positive NPV when evaluated at the company cost of capital, the increase in the discount rate may not be enough to make the project unacceptable. Therefore, using the WACC may still result in a positive NPV, and the project remains acceptable.

A Proposed Project Has a Positive NPV When Evaluated at the Company