The calculation of a specific WACC (Weighted Average Cost of Capital) for an investment project, rather than the use of the company’s overall rate, is imperatively justified when the risk profile or financing structure of the project differs significantly from the company’s average.

Here are the three major justifications identified:

1. The difference in risk profile (Systematic Risk)

The company’s WACC reflects the average risk of its existing business portfolio. If a new project has a different systematic risk (a different sensitivity to macroeconomic conditions), using the group’s WACC would lead to a wrong assessment.

• The principle: If a project has a different risk profile, an individualized WACC should be calculated using a Beta (ß) comparable to that of the business line of the project, not that of the parent company.
• Case in point: If an industrial company (medium-risk) decides to buy a building, it invests in a real estate asset that is generally lower risk (lower beta, often between 0.6 and 0.8). Using the industrial group’s high WACC would unfairly penalise this project. You have to use a lower real estate WACC.
• Application by Business Unit: In large diversified groups (e.g. the oil sector with upstream “exploration” and downstream “refining”), each “Strategic Business Unit” (SBU) must have its own WACC calculated in “stand alone” mode, because the systematic risks are very different.

2. The difference in financial structure (Leverage)

Debt capacity is not uniform across all assets. Some projects raise more debt than others, which changes the cost of capital.

• Impact on the calculation: The WACC depends on the weightings between Debt and Equity. If a specific project (such as the real estate mentioned above) allows for a significantly higher debt ratio than the group, this must be reflected in a specific WACC.
• Mechanism: A different financial structure changes not only the weights (D% and EQ%), but also the cost of equity via Hamada’s formula (Beta increases with debt).

3. The international context (Cross-Border Projects)

When an investment is made abroad, the economic and financial environment changes dramatically.

• Monetary coherence: The project’s cash flows are generally expressed in local currency (e.g. in Rupees for a project in India). To be consistent, they must be updated with a WACC calculated from local parameters: local risk-free rate, local cost of debt and local inflation.
• Market conditions: The cost of debt and the local shareholder return requirement (based on the local market) are not the same as those of the parent company’s country.

In short, applying the company’s single WACC to all projects is a management error as soon as the project goes beyond the “standard” framework of the group’s activity. This could lead to the rejection of safe (but low-return) projects or the acceptance of high-risk projects (whose return does not cover the real risk).