Suppose you are running a capital budgeting analysis on a pr

Suppose you are running a capital budgeting analysis on a project with an estimated cost of $2 million. The project is considered similar to the existing lines of businesses for the company. Given the cash situation, the company will fund the project completely with a new debt of $2 million. This new debt will be issued at 6% interest for 10 years. The company has an estimated 8% WACC. When conducting the capital analysis on this project, what should be your discount rate (cost of capital) for the project? Explain your answer briefly.

Solution

Project discount rates are set based on the riskiness of the project majorly. Not from the source of funding of project. High risky projects will have high discount rate and vice-versa.

Since, the project has same riskiness like other projects, WACC should be used as discount rate.