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Setting the Discount Rate for Capital Projects

M

MrMikeR

Member
Why do we use the Optimal WACC? rather than the current WACC?

In my mind the current reality for a company is better displayed in the latter rather than the former.

Please explain.

Thanks
 
Current WACC only reflects current capital position and changes the moment shares / debt is issued to finance a new project. We assume the company will issue the most efficient form of instrument when raising capital, and so the optimal WACC will provide a better picture of where the company will end up once they have entered into the project (which is the point of Capital Project Appraisal).
 
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