If a firm uses its WACC as the discount rate for all of the projects it undertakes then the firm will tend to:
I.reject some positive net present value projects.
II.accept some negative net present value projects.
III.favor high risk projects over low risk projects.
IV.increase its overall level of risk over time.

Question

Quizplus · Accepted Answer

Using the WACC as the discount rate for all projects can lead to rejecting positive NPV projects if those projects are less risky than the firm's average (since their appropriate discount rate should be lower), accepting negative NPV projects if those projects are riskier than the firm's average (since their appropriate discount rate should be higher), favoring high-risk projects over low-risk projects due to the mismatch in risk assessment, and ultimately increasing the firm's overall level of risk over time as more high-risk projects are accepted.

If a Firm Uses Its WACC as the Discount Rate