WACC Essay Example | Topics and Well Written Essays - 750 words

WACC - Essay ExampleOn the other hand, understating the WACC will result in overstatement of time to come cash flows and net take value, causing a negative net subject value digest to be accepted. If the protrude is a financial backing project, meaning that the cash flow at time 0 is positive and the cash flows in future results are negative, overstating the WACC will result in understatement of future cash flows and overstatement of net be value, causing a negative net present value project to be accepted. On the other hand, understating the WACC will result in overstatement of future cash flows and understatement of net present value, causing a positive net present value project to be rejected.In the discounted payback period approach, WACC is used as the discount set up for etymologizing the present value of future cash flows if the investment is financed by both debt and equity. The investment is accepted if payback period of the investment is less than the cutoff time. Overstating the WACC will result in understatement of future cash flows and overstatement of payback period, causing a project that pay backs within the target payback period to be rejected. On the other hand, understating the WACC will result in overstatement of future cash flows and understatement of payback period, causing a project that pays back after the target payback period to be accepted. In the upcountry account of return approach, WACC is used as the hurdle rate for deciding whether to accept the project. If the project is an investment project, the project is accepted if the internal rate of return exceeds WACC. If the project is a financing project, the project is accepted if the internal rate of return is smaller than WACC. If the project is an investment project, overstating the WACC will result in the internal rate of return smaller than the WACC and an congenial project to be rejected. On the other hand, understating the WACC will result in the internal rate of return greater than the WACC and an unacceptable project to be accepted. If the project is a financing project, overstating the WACC will result in the internal rate of return smaller than the WACC and an unacceptable project to be accepted. On the other hand, understating the WACC will result in the internal rate of return greater than the WACC and an acceptable project to be rejected. In the gainfulness index approach, WACC is used as the discount rate for deriving the present value of future cash flows if the investment is financed by both debt and equity. The investment is accepted if symmetry of the present value of the future cash flows divided by the amount of investment is greater than 1. Overstating profitability index, causing an acceptable investment to be rejected.