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Why is WACC a more appropriate discount rate when doing capital budgeting?
Wiki User
∙ 13y ago
Because it lets the firm know what return it must get on its capital to maintain the value of the company.
Wiki User
∙ 13y ago
WACC (Weighted Average Cost of Capital) is a more appropriate discount rate for capital budgeting because it reflects the overall cost of financing a project. It considers both the cost of debt and the cost of equity, taking into account the proportion of each in the capital structure. By using WACC as the discount rate, the project's cash flows are appropriately risk-adjusted and it helps in determining the economic viability of the investment.
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