Question

1. Why does WACC increase and IRR decrease as the capital budget increases? Are there any steps management can take to reverse these trends?

Answer 1

As the investment increases or the size of the business increases the marginal cost of capital increases with every extra capital raised. Initially the cost of capital might be less but it grows with extra investment. Moreover, higher is the risk more is the cost of capital.
IRR is inversely proportional to the initial investment. So higher the initial investment lower is the IRR. hence IRR decreases.

If the returns or profit grow at a faster rate than the incremental cost of capital then IRR will decrease. Moreover companies can opt for low cost of capital from abroad by issuing share or bond abroad to reduce cost of capital or WACC.

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