Let's say I buy a truck with 70% debt and 30% cash. I want to find the NPV of this project; what discount rate should I use? I know I would use a WACC, and use the cost of debt, but would I also use the cost of cash? What would the cost of cash be? I assume there is no cost of equity right?
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For cash you can use cash equivalents so it'd be fair to use a 90 day treasury of ~2.3%.
Why would there be no cost of equity? Are there no risks associated with owning the truck? Could you not invest the money in any other way other than put it in the bank?
ok maybe i don't understand what cost of equity is. I thought you only have cost of equity if you issue stocks to buy it? lol idk
IN this situation, is the cost of equity just the cost of equity for the entire company that is buying the truck?
30% cash is your “equity” in the truck.
Cost of equity is the rate of return you should receiving if you had invested the cash anywhere else.
Okay, what if I paid for the truck 100% with debt, what would my wacc be?
Then it would only be the cost of debt.
Let's say your cost of debt is 10 % and tax level is 20 %. Cost of debt: 10% * (1-0,2) = 8 % Since you fund the truck with only debt the whole equity part of the equation equals to zero. Ie:
WACC = 0 % cost of equity + 100% cost of debt = 0 + (100% * 8%) = 8%
Are you sure? You just ignore the company's overall wacc?
You should treat the cash as equity.
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