When evaluating an average-risk project using IRR,a firm should use the WACC as the hurdle rate.

Question

Quizplus · Accepted Answer

The average-risk project's IRR should always be compared to the firm's weighted average cost of capital (WACC), which represents the minimum return required by the company to satisfy its investors and shareholders. If the IRR of the project is higher than the WACC, then the project may be accepted because it is generating returns higher than the cost of financing. If the IRR is lower than the WACC, then the project should be rejected because it will lead to negative net present value (NPV) and destroy value for the firm. Therefore, using the WACC as the hurdle rate for an average-risk project evaluation is appropriate.

When Evaluating an Average-Risk Project Using IRR,a Firm Should Use