In order to use the WACC to evaluate a future project's flows, which of the following must hold?
A) The project will be financed with the same proportion of debt and equity as the company.
B) The systematic risk of the project is the same as the overall systematic risk of the company.
C) The project must be viable.
D) a and b above.

Question

Quizplus · Accepted Answer

In order to use the WACC to evaluate a future project's cash flows, the project should be financed with the same proportion of debt and equity as the company (Choice A) to ensure that the cost of capital is reflective of the appropriate risk. Additionally, the systematic risk of the project should be the same as the overall systematic risk of the company (Choice B) to ensure that the WACC is an accurate representation of the required return on investment for the project. The project being viable (Choice C) is important, but it is not directly related to the use of WACC for evaluation. Therefore, a combination of choices a and b is the best answer.

In Order to Use the WACC to Evaluate a Future