Final answer:
A firm should not automatically reject a project that increases its WACC; it depends on a comparison between the increased cost of capital and the expected returns of the project. Factors such as the project's ROI, strategic importance, and fit within the company's portfolio are critical to the decision.
Step-by-step explanation:
The question of whether a firm should accept a project that increases the firm's cost of capital, specifically its Weighted Average Cost of Capital (WACC), is a question that can be primarily answered as 'It depends on other factors'. The WACC is an essential metric in assessing the cost of financing, and an increase in WACC represents a higher cost of financial capital. While a higher WACC generally means that new projects need to generate higher returns to be justifiable, the cost of new capital is just one factor in the decision-making process.
Firms must also consider other factors such as the project's expected rate of return, risk profile, strategic importance, potential for long-term growth, and how it fits within the firm's overall portfolio of projects. If the expected rate of return on the project exceeds the increased WACC, while also satisfying the firm's risk tolerance and strategic objectives, then it might be a viable project to accept despite the increase in WACC.
In business finance, we often look at the concept of 'opportunity cost' and the expected returns on investment (ROI). If a project's ROI is greater than the opportunity cost of capital, which in this case might be reflected by an increased WACC, then the project could still be considered a good investment. Thus, while an increased WACC indicates more expensive capital, the critical factor is the comparison between this cost and the potential returns.