If your company’s weighted average cost of capital is 17% and the IRR on a project...

If your company’s weighted average cost of capital is 17% and the IRR on a project is 12%, would it be profitable to invest?

Expert Solution

The Weighted Average Cost of Capital is the return that is expected on the capital invested in the company. Capital includes common shares, debt, preference shares, etc. WACC is the minimum return that the company needs to earn to pay to its shareholders, lenders, etc.

IRR that is the Internal Rate of Return is what the company actually earns in its business. IRR is the rate of actual return on your invested funds. The internal rate of return will make the present value of cash inflows equal to the initial investment.

To decide whether to undertake a project or not, we should compare its WACC with IRR-

If,

WACC > IRR Reject the project

WACC < IRR Accept the project

WACC = IRR Indifferent

In our question, WACC is 17% and IRR is 12%.

WACC > IRR and hence if we invest in the project, it will not be profitable. It is advisable not to invest.

jeff jeffy answered 1 year ago

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