Given are the question with sample answer. Now I'm looking for a short and nice answer with support (positive) with the answer given below.

Question : Suppose that your company's weighted-average cost of capital is 11 percent. Your company is planning to undertake a project with an internal rate of return of 14 percent, but you believe that this project is not a wise investment for the firm. What logical arguments might you use to convince your boss to forego the project despite its high rate of return? Is it possible that making investments with expected returns higher than your company's cost of capital will destroy value? If so, how?

Answer :

WACC =11%

IRR =14%

In my opinion, the logical argument I will use to convince my boss to forego the project despite its high rate of return is the risk factor.

When you set higher growth rates, the process of valuing growth becomes a little more complex, but the reasoning and assumptions remain the same. When the return on capital exceeds the cost of capital, the value of growth rises as the growth rate rises and the growth cycle lengthens. If the return on capital is equal to the cost of capital, neither the growth rate nor the duration of the growth period affects value; but, if the return on capital is less than the cost of capital, the value moves inversely with the growth rate and the length of the growth period.

A person will not invest in a stock unless the anticipated return is greater than his or her necessary return. Similarly, a business would not invest in a project unless the anticipated profit, known as the IRR, is greater than the company's cost of capital. Hence the cost of capital functions exactly like a required return with respect to business investments. In fact, the terms can be used interchangeably.

And it is possible that making investments with expected returns higher than your company's cost of capital will destroy value because if the investment's Net Present Value (NPV) is negative, allowing investments with higher returns than the firm's cost of capital would destroy value.

Therefore, it doesn't make sense to evaluate high-risk projects with the cost of capital. A rate adjusted upward for risk is more appropriate.