Question

Should a company use the weighted average cost of capital as the hurdle rate for every project in which they invest? Explain your answer.

Answer 1

Yes, it is true that a company use the weighted average cost of capital as the hurdle rate for every project in which they invest because weighted average cost of capital tells about the overall minimum required rate of return. Hence for discounting purpose it is necessary to use WACC as a hurdle rate. Apart from this we know that WACC is minimum required return which is demanded by the investors that is why it is used as hurdle rate.

We know that for evaluating an project we need to know true value of all cash flows that is why these cash flows are discounted on the basis of best hurdle rate and this hurdle rate must be based on overall required costs of all sources used. Such overall costs is known as WACC. That is why weighted average cost of capital is used as the hurdle rate for every project in which they invest.