company wacc vs project wacc
Does the way you finance a project affect the project's wacc? Let's say Apple has a wacc of 10%, and it is starting a new project that has a similar risk profile to the project. However, Apple is paying for this entire project with just cash. In this situation, would it still be appropriate to use the 10% wacc? It just doesn't make sense to me to use a discount rate that takes into account debt when you are not using debt for the project
If the project doesn't have a capital structure (all cash), probably better off evaluating it using a sector avg (for project type) WACC -- so use public comps that are closest pure-play representation for that type of project
Within corporates tho, more likely to evaluate project using different arbitrary discount rates (eg, 8, 10, 12, 15) -- or methods that dont require discount rate (payback period, irr, etc.)
okay, what if I funded the project with 100% debt. What would I use as the wacc? the 10% or would I only use Apple's cost of debt?
Better off to use the sector avg wacc still - if the debt was truly isolated to that project, and had no recourse on overall corporate, then maybe an argument for using the cost of capital for that project (eg, cost of debt), but this seems unlikely
What do you mean by isolated to the project? For example, what if the company was like okay I need 10 million dollars for this new building so I'm gonna go to Bank A to get a 10 million dollar term loan at a 2% interest rate. Is that what isolated means, and would you use 2% as ur wacc in this case?
Is the debt secured to the building with no recourse on the overall company?
What is the purpose of this analysis? Is it a pitch...?
No, just preparing for interviews for project finance.
To answer your question, well wouldn't the bank seize the property if the company defaults, so it would be exclusive to the building. Not sure
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