Using book value of debt and equity is not acceptable in determining the debt-equity ratio for WACC. The ratio must be calculated based on market value of debt and equity on a marginal basis because that will only represent a direct link between the said project and its financing arrangement. The actual or relevant fund going to be used for the project is the money marginally raised in the ratio. Note that market value is appropriate because the investors will require the required rate of returns based on the market value of the capital and not the book value of the capital.
In order to get the viability of the project, Tracy can, however, select an alternative approach. Instead of comparing the IRR with the WACC, she can take MIRR approach. IRR often provides a distorted view of the project finance arrangement because it assumes that any interim cash flows are invested in the rate same as IRR. This assumption is utopian. In MIRR, we first take all the interim cash flows to the beginning and end of the time horizon by using time value of money concept and then calculate the IRR. This gives an accurate picture of the financial viability of the project. Tracey can find MIRR of the project and then can compare with the WACC which she needs to calculate given the market values of debt and equity.
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