The federal reserve recently shifted its monetary policy
The forecasted Net Present Value (NPV) before the change in WACC was $1,456. 300 words
In this case, the change in WACC from 10% to 12% caused the forecasted NPV to decrease by a total of $288. This can be calculated by taking the difference between the two projected net present values ($1,456 – $1,168 = $288).
It is important to note that when interest rates increase (as they did in this case), it typically causes discount rates to rise as well which reduces the present value of future cash flows and therefore decreases NPVs. Additionally, since WACC incorporates both debt and equity components into its calculation any changes that occur with these factors will also have an impact on overall WACC levels.
Therefore when evaluating proposed investments or capital projects it is essential for businesses and investors alike to consider how changes in their weighted average cost of capital may affect their expected returns. In this particular instance, had Martin Manufacturing not taken into account the shifted WACC from 10% to 12%, they would have overestimated potential profits by almost 30%.