Skip to content

ACCA Strategic Professional · Advanced Financial Management · Impact of financing on investment decisions and adjusted present values

For which project is discounting at the company's existing WACC most appropriate, rather than using APV?

Existing WACC is most appropriate for a small project with the same business risk as current operations, financed so the company's capital structure stays unchanged. Those are the assumptions behind WACC-based NPV. Projects with different risk, large gearing changes, subsidies or issue costs are better valued using APV.

  1. AA small project with the same business risk as existing operations, financed so that the company's existing capital structure is maintainedCorrect
  2. BA large project in a new business sector financed mostly by cheap subsidised debt
  3. CA project that will permanently double the company's gearing ratio
  4. DA project in a foreign country financed by a one-off rights issue with high issue costs

Explanation

WACC-based NPV assumes that the project has the same business risk as the company and that the capital structure stays unchanged. A small, similar-risk project financed in existing proportions fits these assumptions. The other options involve different risk, major gearing changes, subsidies or issue costs, which are better handled through APV.

Did you get it right without looking?

One question tells you little. A timed set on Impact of financing on investment decisions and adjusted present values shows your real accuracy, how long you take and where you lose marks.

Practise Impact of financing on investment decisions and adjusted present valuesFree diagnostic mock

More Impact of financing on investment decisions and adjusted present values questions