WACC vs IRR

A statistical method that employs the mathematical and financial analysis principles can be expressed through WACC and IRR. These capital budgeting techniques are essential to suffice the public that includes the owners, analysts, accountants and investors to measure the risk of engaging in financing opportunities. A better economic decision is achieved by relying on these financial techniques.

  WACC IRR
Stands for Weighted average Cost of Capital Internal Rate of Return
Meaning Average cost of funds factoring debts and source of income Analytic tools use by company  to decide if an investment will be undertaken
Usual scenarios AS interest rise so with WACC If projects IRR is > or equal to firms cost of capital= project accepted otherwise should be rejected

To simply explain these two, let’s start with the WACC. As aforementioned, this term stands for weighted average cost of capital. The variable comprising a WACC financial formula include stock investments and long-term debt. The objective of using the WACC will provide a good judgment when it comes to the interest paid by the company every time it borrows or finances by equity. On the other hand, the IRR is an abbreviation for internal rate of return. This financial technique is reliable and effective when the company is evaluating projects for the profit generating purpose. It makes the decision intact and relevant when selecting the best project. The WACC should not be exchanged with IRR or vice versa. These two must come hand-in-hand together for decision-making purposes. Having these two will surely help you seek the best alternative in choosing a project.

Advertisement

No comments.

Leave a Reply