<p>I suspect your post is rather opaque to many users because you silently assume a certain amount of knowledge (acronyms included).</p>
<p>But the general rule-of-thumb is &quot;use the <strong>W</strong>eighted <strong>A</strong>verage <strong>C</strong>ost of <strong>C</strong>apital that represents well the targeted fund-providers&quot;.</p>
<p>As a benchmark, sure, use the firm's WACC as it currently stands, but, see, this WACC already implies an assumption: that the project will be funded by a mix that reflects the current funding mix of the company.</p>

CC BY-SA 4.0
2023-04-09T21:02:22.333Z
2023-04-09T21:02:22.333Z
Alecos Papadopoulos
<p>I've found this <a href="https://ocw.mit.edu/courses/15-402-finance-theory-ii-spring-2003/51227cf624ebb0b4043c743d84e1335d_lec14awaccapv.pdf" rel="nofollow noreferrer">MIT lecture notes</a> that says that &quot;The common intuition for using WACC (for NPV calculations) is that to be valuable the Project should raise more than it costs to raise the necessary financing. <strong>This intuition is wrong</strong> .... <strong>Discount rates and hence the WACC are project specific!</strong> &quot;</p>
<p>To me this sounds insane. If I am trying to get the &quot;market price&quot; of the Project, in an effort to secure additional ring fenced funding for an investment through an SPV then sure, using Project specific discounting will give me the market price. But, if I am even remotely realistic about my company's ability to raise those funds then I need to look at my WACC.</p>
<p>Consider SVB, which failed on March 10th. Let's say on March 9th it went to the markets and said, &quot;Hey, We would like to invest in TIPS (Treasury Inflation Protected Securities), they are trading on par, so just give us a bunch of money. It is totally safe investment because according to MIT each project must be valued as a stand-alone, so you shouldnt look at how the rest of the company is doing&quot;.</p>
<p>I would not be holding hope that SVB's valuation of new projects as stand-lone would help them fund those on March 9th.</p>
<p><strong>If we are trying to get the market value of a Project then we should treat it as a stand alone</strong> <strong>but  if we are trying to figure out if a particular firm should invest in a project then it's gotta be discounted using discount rates that capture the credit risk</strong> <strong>and other risks associated with that firm</strong>, which are perhaps captured in a poor way but captured none-the-less by WACC.</p>
<p>Much in the same way, let's say I am a poor person living paycheck to paycheck and I get this investment opportunity to invest in TIPS. I am barely banked and my only avenue to raise funds are from pay-day loans. Do I calculate the NPV of investing in TIPS by treating TIPS as a standalone project? To me that sounds insane.</p>
<p>What am I missing here? Any guidance will be greatly appreciated.</p>

<discount-rate>
When is WACC appropriate to use?
Amatya
# When is WACC appropriate to use?

(Asked by: username_0 on 2023-04-07)

I've found this [MIT lecture notes](https://ocw.mit.edu/courses/15-402-finance-theory-ii-spring-2003/51227cf624ebb0b4043c743d84e1335d_lec14awaccapv.pdf) that says that "The common intuition for using WACC (for NPV calculations) is that to be valuable the Project should raise more than it costs to raise the necessary financing. **This intuition is wrong** .... **Discount rates and hence the WACC are project specific!** "

To me this sounds insane. If I am trying to get the "market price" of the Project, in an effort to secure additional ring fenced funding for an investment through an SPV then sure, using Project specific discounting will give me the market price. But, if I am even remotely realistic about my company's ability to raise those funds then I need to look at my WACC.

Consider SVB, which failed on March 10th. Let's say on March 9th it went to the markets and said, "Hey, We would like to invest in TIPS (Treasury Inflation Protected Securities), they are trading on par, so just give us a bunch of money. It is totally safe investment because according to MIT each project must be valued as a stand-alone, so you shouldnt look at how the rest of the company is doing".

I would not be holding hope that SVB's valuation of new projects as stand-lone would help them fund those on March 9th.

**If we are trying to get the market value of a Project then we should treat it as a stand alone** **but if we are trying to figure out if a particular firm should invest in a project then it's gotta be discounted using discount rates that capture the credit risk** **and other risks associated with that firm**, which are perhaps captured in a poor way but captured none-the-less by WACC.

Much in the same way, let's say I am a poor person living paycheck to paycheck and I get this investment opportunity to invest in TIPS. I am barely banked and my only avenue to raise funds are from pay-day loans. Do I calculate the NPV of investing in TIPS by treating TIPS as a standalone project? To me that sounds insane.

What am I missing here? Any guidance will be greatly appreciated.

**Tags:** discount-rate


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## 1 answers

### Answer by username_1 on 2023-04-09. Score: 2

I suspect your post is rather opaque to many users because you silently assume a certain amount of knowledge (acronyms included).

But the general rule-of-thumb is "use the **W**eighted **A**verage **C**ost of **C**apital that represents well the targeted fund-providers".

As a benchmark, sure, use the firm's WACC as it currently stands, but, see, this WACC already implies an assumption: that the project will be funded by a mix that reflects the current funding mix of the company.


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