You have learned how to use NPV and IRR to evaluate projects as part o

You have learned how to use NPV and IRR to evaluate projects as part of a capital budgeting decision-making process. How is WACC used in each of these capital-budgeting processes?

What will be an ideal response?

ANSWER

Answer: When calculating the NPV of a project, the WACC is the appropriate required rate of return if the project is of average risk. It is also the starting point for making subjective adjustments to the required rate of return for projects of greater or lesser risk than average. When calculating the IRR, the WACC is the appropriate hurdle rate for determining if a project meets the investment criteria.