Suppose you own a chain of dry cleaners and the WACC you’ve been using to make...

Suppose you own a chain of dry cleaners and the WACC you’ve been using to make decisions on new purchases of dry cleaning equipment is a steady 9%. Recently, gambling has been made legal in your home town so you decide to expand and open up a casino. Should you use the same WACC to evaluate purchases of casino equipment? Why or why not? What are some alternatives to using the same WACC to make decisions on casino equipment? Explain your reasoning, and make references to concepts from the background readings.

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Expert Solution

Analysis And Solution:

For chain of Dry cleaner One used WACC model to evaluate its effective purchase deceision.

The WACC is used to find out expected return of that particular project when it is compared to its initial cost of purchase. if the return is greater than its cost , then that project is accepted.

So Expected Return must be Greater than its Cost of initial Investment or cost of purchase.

The man used it for first case i.e for purchasing decesion for Dry cleaners.

And second gambling is allowed or made legal for opening of casino. The man decided to expand his business . He can use WACC if market value of those investment i.e cost of purchase is less that the expected return from investment.

There is another alternative WACC is APV adjusted present value concept which is used to know how an existing asset can generate future cash flow . APV is has less yiled error and it always work when WACC doesnot work. The restriction on APV are much less as compare to WACC . So in general Apv is favoured investment decesion process than WACC.

jeff jeffy answered 1 year ago

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