What cost of capital is appropriate when performing an unlevered DCF?

When performing an unlevered Discounted Cash Flow (DCF) analysis, the appropriate cost of capital to use is the Weighted Average Cost of Capital (WACC). This is because the unlevered DCF focuses on a project's cash flows without considering the effects of debt financing.

WACC represents the average rate that a company is expected to pay to finance its assets, weighted by the proportion of equity and debt in its capital structure. In the context of an unlevered DCF, you're looking at the risk of the firm's assets as a whole, independent of how those assets are financed. Thus, WACC provides a comprehensive measure that incorporates both equity and debt costs, reflecting the overall risk associated with the firm's operational cash flows.

Using WACC is critical because it accounts for the opportunity cost of investing capital in the business as opposed to the greatest alternative investment, which aligns with the fundamental principles behind the DCF valuation methodology.

In summary, employing the WACC in an unlevered DCF analysis ensures that the valuation accurately reflects the total expected return on assets, without the influence of debt, thereby yielding a more precise evaluation of the firm's unlevered value.