He wacc is the appropriate discount rate for use with projects but should be adjusted for higher risk ones

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04-08-2022
Business

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He wacc is the appropriate discount rate for use with projects but should be adjusted for higher risk ones

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sakshigupta4990 sakshigupta4990 · Answer 1 · 2022-08-10T10:29:25-04:00

The WACC is the appropriate discount rate for use with average projects but should be adjusted upward for higher-risk ones.

Securities analysts may use WACC when evaluating the value of investment opportunities. For example, in discounted cash flow analysis, as a discount rate for future cash flows, he can apply WACC to derive the net present value of the firm.

Using the WACC discount rate makes the present value of investment appear higher than it actually is.

Businesses typically use the weighted average cost of capital (WACC) as the discount rate. This is to take into account the rate of return expected by shareholders. DCF has limitations. Primarily, it relies on estimates of future cash flows that may be inaccurate.

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