What discount rate do you use to calculate your project's NPV? If the answer is "I put 10% because that's what the textbook says," your NPV is lying to you. The right rate is WACC — and for a small business in a high-inflation economy, it's rarely below 30%. Getting it wrong can turn a value-destroying project into one that looks brilliant.
What WACC is and why it matters
WACC (Weighted Average Cost of Capital) is the minimum rate of return a project must generate in a financial feasibility analysis for it to be worth pursuing. It combines two costs:
- The cost of debt — what you pay on loans.
- The cost of equity — what you require on your own capital.
Each one is weighted by its share of total financing.
In simple terms: if you finance your business half with a loan at 8% and half with your own capital at which you require 18% return, your WACC is roughly 13%. Any project that doesn't yield at least that destroys value.
Use WACC as the discount rate in your analysis →The WACC formula
WACC = (E/V) × Ke + (D/V) × Kd × (1 − T)
Donde
- E
- Equity value (your own capital)
- D
- Debt value (loans)
- V
- V = E + D (total financing)
- Ke
- Cost of equity (minimum return required by the owner)
- Kd
- Cost of debt (loan interest rate)
- T
- Income tax rate
Criterio de decisión
- Project IRR > WACC
- The project creates value — invest
- Project IRR < WACC
- The project destroys value — reject
The (1 − T) term applied to debt reflects the tax shield: interest is tax-deductible, which reduces the real cost of borrowing. It's the only reason debt is almost always cheaper than equity.
The two components, in detail
Cost of debt (Kd)
The effective interest rate on your loans: bank credit, lines of credit, factoring, partner debt. If you have a loan at 9% per year, that's your Kd.
Always use the effective annual rate, not the nominal one — the difference on monthly-installment financing can be 10+ points.
Cost of equity (Ke)
The most subjective component and the one that produces the most errors. Ke is the minimum return you require on your personal investment. It's not "how much I want to earn" — it's opportunity cost: what you could earn putting that same money in the best available alternative.
To set it, sum three components:
- Risk-free rate: yield on a sovereign bond or term deposit.
- Business risk premium: 10–20% for the risk of running a business vs. a safe investment.
- Illiquidity premium: 5–10% because your capital is locked up.
In high-inflation economies, with deposits at 30–40%, a reasonable Ke for a medium-risk small business is 45–55%. In stable economies, the equivalent ranges from 12–22%. See the full guide for setting MARR →
Example: textile manufacturing SME
A clothing factory finances itself this way:
| Funding source | Amount | Share | Cost |
|---|---|---|---|
| Equity (E) | $200,000 | 57% | Ke = 22% |
| SME bank loan (D) | $150,000 | 43% | Kd = 9% |
| Total (V) | $350,000 | 100% | — |
WACC = (E/V) × Ke + (D/V) × Kd × (1 − T)
Desarrollo
- 1.Tax rate (T) = 35%
- 2.Equity component: 0.57 × 22% = 12.54%
- 3.Debt component: 0.43 × 9% × (1 − 0.35) = 2.52%
- 4.WACC = 12.54% + 2.52% = 15.06% ≈ 15%
Criterio de decisión
- Project IRR > 15%
- The project creates value for this financing structure
The 15% WACC is the discount rate you use to calculate NPV. If the project's IRR is 26%, the business yields 11 points above the cost of capital. Solid value creation.
Before committing equity or taking out a loan, calculate your WACC and use it in the dashboard as the discount rate. The gap with an NPV calculated at 8% can be the difference between a viable project and a suicidal one.
Reference WACC ranges for small businesses
| Sector | WACC high-inflation econ. | WACC stable econ. |
|---|---|---|
| Food service | 32–45% | 15–22% |
| Retail | 30–42% | 13–20% |
| Manufacturing | 28–40% | 12–18% |
| B2B services | 25–38% | 10–16% |
| E-commerce | 35–50% | 18–28% |
| Tech / SaaS | 40–60% | 22–35% |
Ranges in high-inflation economies are elevated due to structural inflation and systemic risk. In stable markets, WACC is significantly lower. The same project that needs to yield 45% in one country may be viable yielding 18% elsewhere.
Common mistakes when calculating WACC
- Using textbook 12% Ke. That number comes from developed markets with 2–3% inflation. In high-inflation economies, it generates artificially positive NPVs.
- Skipping the tax shield. Calculating debt cost without subtracting the tax benefit overstates WACC and rejects viable projects.
- Ignoring the cost of equity. "I put my own money, I don't charge myself interest" is the fundamental error. Equity has opportunity cost. If you don't model it, WACC is artificially low.
- Not updating it over time. As you pay down debt or bring in a partner, the structure changes. Recalculating each year keeps the analysis honest.
Use WACC as the discount rate
WACC answers the question "what MARR do I use to calculate NPV?" Once calculated with your real structure, you input it as the discount rate and get an NPV that reflects the true cost of capital — not an arbitrary guess.
Apply what you read — calculate your WACC with this article, load it into the dashboard as MARR, and close the analysis with a sensitivity analysis showing how exposed your project is to changes in WACC.
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