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Company versus Project Discount Rates
Company versus Project Discount Rates. Geothermal's WACC is 11.4%. Executive Fruit's WACC is 12.3%. Now Executive Fruit is considering an investment in geothermal power production. (L013-2) a. Should it discount project cash flows at 12.3%? b. What would be a better discount rate for this investment?
Expert Solution
a) Executive Fruit is considering an investment in geothermal power production; then it should choose a discount rate which reflects the risk of the project. Therefore, Executive Fruit cannot select a discount rate of its own. No, It should not discount project cash flows at 12.3%.
b) WACC of Geothermal would reflect the risk of this project better. So, 11.4% would be a better discount rate for this investment.
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