FMF9
Syllabus E. Business Finance E3. Sources of finance and their relative costs

Impact of cost of capital on investments 4 / 6

Impact of cost of capital on investments

if a company has a low cost of capital, it will have higher NPVs

A positive NPV of 100 will increase the value of a company by 100

So, the lower the cost of capital the higher the value of a company

WACC can be used to appraise an investment when:

  • The project is relatively small

  • The existing capital structure (debt to equity) will be maintained

  • The project has the same business risk