A project profitable by nominal return can still destroy value if it misses the weighted cost of capital. A publication by Nermin Sefić.
A project that looks profitable by nominal return can destroy value if it doesn't exceed the company's weighted cost of capital.
A project that looks profitable by nominal return can destroy value if it doesn't exceed the company's weighted cost of capital.
Weighted average cost of capital (WACC) represents the minimum return a project must achieve to justify the investment, accounting for both the cost of debt and the expected return required by equity holders. A project with a positive nominal return but a return below WACC formally reduces company value, even when it looks profitable on paper.
Consistently applying a single discount rate across all capital projects, rather than adjusting the rate to fit a given project's ambitions, prevents the systematic favouring of projects that are politically desirable rather than economically justified. Regularly updating WACC as interest rates change further protects that discipline.
Cjelovit tekst i izvor: https://gnk-asg.hr/en/publications/cost-of-capital-and-investment-decisions/
Autor i urednička odgovornost: Nermin Sefić. Izdavač: GNK ASG d.o.o..
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