Have you ever wondered why some investment projects seem attractive but their returns don't meet expectations? I just discovered that the problem lies in our focus only on the projected returns, while forgetting to consider the actual cost of capital used for investment.

So, how can we tell if an investment is worthwhile? This is where WACC or Weighted Average Cost of Capital comes in. WACC tells us how much a company has to pay to raise funds to operate its business, which is crucial information for making investment decisions.

Simply put, WACC is the average cost of all the capital a company uses, whether from borrowing or from shareholders' investments. It combines both sources into one figure. Most investors use this WACC value to assess whether a project is truly worth investing in.

Where does a company's capital come from? Generally, there are two main sources: the cost of debt, which is the interest the company pays to banks or financial institutions, and the cost of equity, which is the return shareholders expect to receive.

Calculating WACC isn't as difficult as you might think. Use the formula WACC = (D/V)(Rd)(1-Tc) + (E/V)(Re), where D/V is the debt ratio, Rd is the cost of debt, Tc is the tax rate, E/V is the equity ratio, and Re is the expected return.

Let's look at a real example. Suppose company XYZ has 100 million baht in debt (60%) and 160 million baht in equity (40%). The borrowing interest rate is 7% per year, the tax rate is 20%, and the expected return is 15%. Plugging these into the WACC formula for this company gives approximately 11.38%. This means if the actual return exceeds 11.38%, the investment is considered worthwhile.

A lower WACC is better because it indicates the company has a lower cost of raising funds. However, other factors should also be considered, such as the industry the company operates in, project risk, and investment policies. The basic rule is: if return > WACC, it's worthwhile; if return < WACC, it's not.

But be cautious—WACC has some limitations. First, it doesn't account for future changes, like fluctuations in interest rates or debt levels. Second, it doesn't consider the risk profile of different types of investments. Third, calculating WACC can be complex and requires accurate current data. Lastly, WACC is only an estimate, as many factors can change over time.

From my experience, to effectively use WACC, it should be combined with other metrics like NPV (Net Present Value) and IRR (Internal Rate of Return) to get a comprehensive view of an investment. Also, it's important to update WACC calculations regularly because interest rates and economic conditions change constantly. If WACC doesn't align with expectations, it may be time to consider shifting investments elsewhere.

In summary, WACC is a vital financial indicator for evaluating the profitability of investments and a company's capital structure. However, it must be used carefully, considering its limitations and other influencing factors, to make the best investment decisions.