Reading 45: Cost of Capital-LOS e 习题精选

LOS e: Explain the marginal cost of capital's role in determining the net present value of a project.

The WACC is the appropriate discount rate for projects that have approximately the same level of risk as the firm’s existing projects. This is because the component costs of capital used to calculate the firm’s WACC are based on the existing level of firm risk. To evaluate a project with above (the firm’s) average risk, a discount rate greater than the firm’s existing WACC should be used. Projects with below-average risk should be evaluated using a discount rate less than the firm’s WACC. An additional issue to consider when using a firm’s WACC (marginal cost of capital) to evaluate a specific project is that there is an implicit assumption that the capital structure of the firm will remain at the target capital structure over the life of the project. These complexities aside, we can still conclude that the NPVs of potential projects of firm-average risk should be calculated using the marginal cost of capital for the firm. Projects for which the present value of the after-tax cash inflows is greater than the present value of the after-tax cash outflows should be undertaken by the firm.