Under what conditions is the WACC the appropriate discount rate for a

QUESTION

Under what conditions is the WACC the appropriate discount rate for a project?
It is now generally accepted that discounted cashflow techniques for evaluating projects are far superior to the use of simple payback approaches or accounting rates of return. The shareholder value-added approach enhances these techniques further. However, to use these techniques requires the calculation of the project cost of capital. In the absence of a suitable discount rate NPV and IRR¦

approaches have no meaning.Provided that the project achieves the expected return and that, when adjusted for the risk of that project, the return is in excess of the companys weighted average cost of capital (WACC), the shareholders are better off than before.

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