The Impact of WACC on Capital Budgeting and Structure Essay

The Impact of WACC on Capital Budgeting and Structure - Essay Example The first step is to prepare comprehensive cash flow estimate information for the project under consideration. This step is then followed by forecasting a suitable discount rate to be used in the evaluation of the net present value (NPV). "This discount rate is the return required by the investors to compensate for handing over their capital to the company. It is also known as the company's hurdle or weighted average cost of capital (WACC)."(singh 2005. 26) According to Donald Riggin of Albert Risk Management Consultants, "The weighted average cost of capital is the company's cost of maintaining capital, of owning capital." (2007. Para.4) theoretically speaking, both the concept and its importance as a company's performance measure are very well established. In fact, the company's failure to make up its debt cost is considered by many experts to be the most obvious crisis indicator. The accuracy of the WACC calculations are extremely important to avoid such scenarios as they assist the administration determining projects that are most suitable for the company.