On the applicability of WACC for investment decisions

Jaime Sabal Cárdenas

Producció científica: Estudi de cas


Although WACC (weighted average cost of capital) is appropriate for project and firm valuation, it is not a good rule for investment decision making. The reason is that by mixing up the value of the project itself with the tax shield, WACC can often turn unattractive projects into apparently acceptable ones. Real investments must be accepted only if they yield positive net present values when discounted at the unleveraged discount rate, that is, without accounting for the tax shield. WACC enters the picture only to assess the impact of a new project on firm value, once it has been accepted, and when a fixed debt ratio policy is in place.
Idioma originalAnglès
Estat de la publicacióPublicada - 1 de gen. 2006
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