The Subjective Approach

Because of the difficulties that exist in objectively establishing discount rates for individual projects, firms often adopt an approach that involves making subjective adjustments to the overall WACC. To illustrate, suppose a firm has an overall WACC of 14 percent. It places all proposed projects into four categories as follows:

Category

Examples

Adjustment Factor

Discount Rate

High risk

New products

+6%

20%

Moderate risk

Cost savings, expansion of existing lines

+0

0 0

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