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Featured content. Free courses. All content. Course content. About this free course 15 hours study. It only makes sense for a company to proceed with a new project if its expected revenues are larger than its expected costs—in other words, it needs to be profitable.
The discount rate makes it possible to estimate how much the project's future cash flows would be worth in the present. The higher the discount rate, the smaller the present investment needs to be to achieve the revenue required for the project to succeed.
WACC used as a discount rate is crucial in budgeting in order to generate a fair value for the company's equity. An appropriate discount rate can only be determined after the firm has approximated the project's free cash flow. Once the firm has arrived at a free cash flow figure, this can be discounted to determine net present value. Setting the discount rate isn't always straightforward. Even though many companies use WACC as a proxy for the discount rate, other methods are used as well.
In situations where the new project is considerably more or less risky than the company's normal operation, it may be best to use the capital asset pricing model to calculate a project-specific discount rate. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.
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