Capital budgeting Process: WACC, payback, NPV, risk, ROA
1. Why would a manager use the Weighted Cost of Capital for investment decisions when a specific project may be funded by a particular source of capital, (e.g. debt or equity)?
2. What capital budgeting process and evaluation does your organization (or one you can talk to) use? Specifically what Pay Back Period and NPV discount factor is used and how does the company adjust for risk? You will probably need to ask someone in the financial department on this one.
3. If a company had a ROA percentage lower than its cost of capital for a number of years what problems would you look for in the Capital budgeting process?© SolutionLibrary Inc. solutionlibary.com 9836dcf9d7 https://solutionlibrary.com/business/finance/capital-budgeting-process-wacc-payback-npv-risk-roa-35o
...otential returns from a single operation because the risk profile of our company is determined by consolidated operations. If we issue new equity for a project, it is because our ratio of debt is at its limit, not because the new project itself is risky. Consequently, new funding options are primarily determined by existing capital structure and not the characteristics of the new project.
b) Finding a perfectly comparable firm/operation is difficult, and using another firm's WACC may be no better than using your own if that firm also has a variety of operations in its portfolio of businesses.
Using the same WACC for all operations is easier and more practical for most managers.
2) It looks like you are expected to talk to a company for this one. As preparation I'll give you some methods that are commonly used. By ...