COST OF CAPITAL
A project's Cost of Capital is the smallest amount of acceptable rate of return/required rate of return on funds committed to the project. It is a compensation for time and risk in the use of capital by the project. Since the investment projects may vary in risk, each one of them will have its own exclusive cost of capital.
The Firm represents the aggregate of investment projects undertaken by it. so, the firm's Cost of Capital will be the overall required rate of return on the aggregate of the investment projects.
- In NPV method, the Cost of Capital is the discount rate used for evaluating the desirability of an investment project.
- In IRR method, Cost of Capital is the smallest amount of required rate of Return on an investment project. It is also known as the cut off or forget rate or the Hurdle rate.
- The Cost of Capital is the smallest amount of required rate of return on the investment project. It is also known as the cut off or target rate or the hurdle rate.
- The Cost of Capital is the smallest amount required rate of return on the investment project that keeps the present wealth of shareholders unchanged.