Problem:
Using the Weighted Average Cost of Capital (WACC) to evaluate all projects may lead managers into accepting high-risk projects that do not compensate adequately for risk and into rejecting low-risk projects that compensate fully for the level of risk but may not have particularly high rates of return.
Required:
Question: Describe the situations when using a WACC is not appropriate and how these incorrect decisions may be made.
Note: Please show how to work it out.