Question

How do companies use their cost of capital (WACCs) in making investment decisions?

Answer 1

The companies use the WACC to make investment decisions. If the IRR > WACC , then we can accept the project and reject the project if the opposite happens. The WACC is also used as the discount rate for calculating the NPV of the project, once the future cash flows are discounted at the WACC and the NPV is positive , then we can be quite sure that accepting this project is going to add value to the project , hence the project should be accepted. The WACC is sued as the hurdle rate for companies.

The WACC is the minimum return required by the investors of capital in a firm/company.