This refers to a mock exam question: When increasing invested capital to take advantage of positive NPV projects, NOPAT and the dollar cost of capital increase. I get how the dollar cost of capital increases when increasing invested capital (dollar cost of capital = WACC x $ amount of investment). But how does NOPAT increase with an increase in invested capital?
If you have multiple, profitable, NPV projects, you have the ability to borrow and deploy capital across the projects. Thus more NOPAT.
NOPAT’s not increasing because invested capital is increasing.
NOPAT’s increasing because you’re working on more positive NPV projects: making more money increases NOPAT.
thanks!
You’re welcome.