Analytical tools for applying the dynamic WACC rate in financial modeling of investment projects
DOI:
https://doi.org/10.17308/meps/2078-9017/2026/6/134-153Keywords:
financial modeling, dynamic WACC rate, investment project, macroeconomic conditions, management accounting, discounted cash flows, cost of capitalAbstract
Importance: the study addresses the application of the dynamic Weighted Average Cost of Capital (WACC) in financial modeling of investment projects under volatile monetary policy conditions. Fixed WACC in periods of elevated short-term rates often leads to an excessive reduction in discounted cash flows and distortion of project performance metrics. Purpose: to develop a methodology for calculating and applying dynamic WACC that incorporates projected changes in the key interest rate, cost of equity and debt, credit spreads, inflation, and macroeconomic conditions, and to evaluate its practical value for managerial decision-making. Research design: the study employs system analysis, financial modeling, discounted cash flow calculations, and formalization of forecast assumptions. The dynamic WACC framework integrates key components, including cost of equity and debt, country risk premium, size premium, and currency and inflation factors. A comparative analysis of fixed and dynamic WACC scenarios is performed to assess project investment viability. Results: a methodology for computing dynamic WACC as the sum of annual discounting factors is proposed. It demonstrates that using dynamic WACC allows for accurate accounting of capital cost variations, reduces distortions in discounted cash flows, expands analytical evaluation of projects, and mitigates the risk of rejecting potentially profitable investments. The methodology is applicable for managerial accounting and investment decision-making in highly volatile macroeconomic environments.
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