Feb. 5 (UPI) -- Part 4 of a series examining structural barriers to growth and competitiveness in Latin America.
Imagine a company considering a $500 million lithium project in northern Chile. The geology is promising. Global demand for batteries is rising. The technology exists. Yet the project may still not proceed.
Why? Because the expected return must exceed the company's cost of capital, the price it pays to use money from investors and lenders. If the project cannot clear that hurdle, it will be postponed or cancelled, no matter how attractive it appears on paper.
Earlier articles in this series explained why capital is expensive in Latin America. This installment shows how companies translate those regional risks into concrete investment decisions. The key tool they use is the weighted average cost of capital, or WACC. In practice, it is the benchmark firms use to decide whether an investment moves forward.
In simple terms, WACC represents the minimum return a project must generate to create value. It combines two sources of financing: equity from shareholders and debt from lenders. Because interest payments on debt are partly tax-deductible, borrowing is slightly cheaper after taxes than the headline interest rate suggests.
