ECONOMICS

Detailed explanation-1: -For instance, WACC is the discount rate that a company uses to estimate its net present value. As the majority of businesses run on borrowed funds, the cost of capital becomes an important parameter in assessing a firm’s potential for net profitability. WACC measures a company’s cost to borrow money.

Detailed explanation-2: -The Weighted Average Cost of Capital serves as the discount rate for calculating the Net Present Value (NPV) of a business. It is also used to evaluate investment opportunities, as it is considered to represent the firm’s opportunity cost. Thus, it is used as a hurdle rate by companies.

Detailed explanation-3: -Your company’s weighted average cost of capital (WACC, a discount rate formula we’ll show you how to calculate shortly) is often used as the discount rate when calculating NPV, although it is sometimes thought to be more appropriate to use a higher discount rate to adjust for risk or opportunity cost.

Detailed explanation-4: -From an investor’s perspective, the WACC is commonly used as the discount rate to determine the present value of a company’s future cash flows, such as in a discounted cash flow (DCF) model or dividend discount model (DDM).