What differentiates WACC from IRR?

The correct choice highlights the fundamental relationship between WACC (Weighted Average Cost of Capital) and IRR (Internal Rate of Return). WACC represents the average rate of return required by all of a company's investors, including both equity and debt holders. Essentially, it is a blended cost of capital that reflects the overall cost of financing for a company.

In contrast, IRR is specifically the discount rate that makes the net present value (NPV) of a project zero; it can be thought of as the expected rate of return on a specific investment or project. The IRR is used to evaluate the potential profitability of a project, helping companies decide whether or not to undertake it based on whether the IRR exceeds the WACC.

This distinction is crucial because while WACC is a broad measure applied across the entire organization to understand the cost of capital, IRR is project-specific and used to assess the viability of particular investments. Understanding this difference allows for more informed decision-making regarding whether a venture will yield returns that meet or exceed the company's overall cost of capital.