ACCA · Question 10 · Estimating the Cost of Capital
'RoboMinds', an AI robotics firm, is considering diversifying into autonomous agricultural vehicles. This new venture has a significantly different risk profile from its current operations.
Why is it inappropriate for RoboMinds to use its current Weighted Average Cost of Capital (WACC) to appraise this new project?
Answer options:
The current WACC reflects the business risk of existing AI robotics operations, not the agricultural vehicle sector.
The new project will require entirely new debt financing, which invalidates the WACC formula.
Agricultural projects are heavily subsidized, meaning the cost of capital is effectively zero.
WACC can only be used for projects with a lifespan of less than 5 years.
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