So I understand the basics of discounting and opportunity cost. An amount of money in the future is not worth as much today because we lose the chance of investing it for further returns. This opportunity cost is the foregone interest rate.
However, when discounting by WACC, we are not given the same opportunity. My point, if you’re a risky business and you approach a bank for a loan, and say they charge you 12% because of your inherent risk, this 12% would have not been given to you if you were to deposit money with that bank, the rate would have been lower, that being said, should we really discount using that rate?
WACC considers the weighted costs of borrowing for a company overall or a particular set of projects through debt, ordinary shares & preference shares. This is needed to calculate what an investment decision is going to cost the company, if they believe their project will generate their required rate of return (which would be higher than they can receive on a bank deposit in the longrun) then they would accept the project and acquire funding. So… to answer your question, the ‘required rate of return’ firms have to accept/decline a project covers the predicament you mentioned.
If the risk of a particular project is significantly higher than or significantly lower than the average risk for a company, the discount rate should be adjusted up or down, respectively, from the company’s WACC when computing the project’s NPV.
I have no idea how often this is done in practice, however.