Corporate Finance MGT 505

timer Asked: Nov 23rd, 2014

Question description

You are the CFO and your team has developed the weighted average cost of capital that is used to evaluate capital projects. Their analysis generated a WACC of 15 percent. The COO is very interested in a project that has an IRR of 13 percent. He makes the statement that the WACC is irrelevant, because the project could be financed with money available to be borrowed through an unused two-year debt facility with an interest rate of 7 percent, which is significantly less than the 15 percent cost of capital. He also defends the project by saying this is a one-time opportunity that will bring more jobs into the community which will bring immeasurable goodwill toward the company. How would you respond to the COO’s comments?

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