11.4 Using the Weighted Average Cost of Capital in a Budgeting Decision
How does the adjusted WACC actually work in deciding which projects to accept and which to reject? Once we determine the adjusted WACC for a company, we select a decision model and use the adjusted WACC with a project’s estimated future cash flows to determine if we should accept or reject the project.
To arrive at this accept-or-reject decision, let’s return to Kyle’s project, which will require an initial investment of $5 million. Kyle has estimated the incremental cash flow for the new project. Table 11.1 displays the data. If Kyle’s company has an adjusted WACC of 12%, should Kyle accept or reject this project?
You know from Chapter 9 that we can choose among six capital ...
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