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#cfa-level-1 #corporate-finance #reading-36-cost-of-capital

If we choose to use the company’s WACC in the calculation of the NPV of a project, we are assuming that the project:

  • has the same risk as the average-risk project of the company, and

  • will have a constant target capital structure throughout its useful life.3

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2.3. Applying the Cost of Capital to Capital Budgeting and Security Valuation
e of the cash outflows, discounted using that same opportunity cost of capital: NPV = Present value of inflows − Present value of outflows If an investment’s NPV is positive, the company should undertake the project. <span>If we choose to use the company’s WACC in the calculation of the NPV of a project, we are assuming that the project: has the same risk as the average-risk project of the company, and will have a constant target capital structure throughout its useful life.3 These may not be realistic or appropriate assumptions and are potential drawbacks to using the company’s WACC in valuing projects. However, alternative approaches a


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