Suppose that your company’s weighted-average cost of capital is 9 percent. Your

Question

Suppose that your company’s weighted-average cost of capital is 9 percent. Your company is planning to undertake a project with an internal rate of return of 12%, but you believe that this project is not a good investment for the firm. What logical arguments might you use to convince your boss to forego the project despite its high rate of return? Is it possible that making investments with expected returns higher than your company’s cost of capital will destroy value? If so, how?

If the investment is above the company’s average risk, the company’s cost of capital is not an appropriate benchmark. Equivalently, you might argue that the high risk of the investment places it below the security market line. Such investments destroy value because they promise returns that, while greater than the company’s WACC, are still below those available on similar-risk investments available. Other possible arguments include that the investment is not consistent with the strategic plan or that the cash flow estimates are too optimistic.

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Suppose that your company’s weighted-average cost of capital is 9 percent. Your

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