A company's Weighted Average Cost of Capital (WACC) — which is the rate of return required by investors in the company's securities — is the appropriate discount rate (or hurdle rate) to use in capital budgeting decisions and NPV calculations as long as the riskiness of the project is the same as the riskiness of the firm's existing business. If management wants to factor the risk of a project into its analysis, it will increase the discount rate used in NPV calculations for more risky, or uncertain, investments. A higher discount rate will require higher expected future cash flows in order for the company to make the investment, thus making fewer investments acceptable.
The method of funding a project is a separate decision from the capital budgeting analysis.
The method of funding a project is a separate decision from the capital budgeting analysis.
A high hurdle rate of return would require higher future cash inflows from a project in order for the project to be acceptable. Therefore, a high hurdle rate will result in fewer projects being accepted.
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