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CAPITAL INVESTMENT APPRAISAL
Discount rate
• The target weighted average cost of capital should be used to discount
future cash flows.
SUMMARY:
• If two projects are identical the manner in which they are financed does
not impact on the performance of the asset or help determine whether
the project is viable or not. Therefore the method of financing is ignored
when making the investment decision. Therefore we use the WACC as a
discount rate.
• If an investment yields a positive NPV then the company must decide
how to finance the investment (so that the move towards their target
capital structure in the long term). It is not necessary for a company to
be at it’s target structure at ant particular point in time, but they should
strive towards the target in the long term.
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