Answer to Question #275217 in Accounting for kelly

Question

Explain the meaning of cost of capital and its relevance in a net present value (NPV) analysis.

Answer 1

The cost of capital represents the minimum desired rate of return (i.e., a weighted average cost of debt and equity capital). The net present value (NPV) is the difference between the present value of the expected cash inflows and the present value of the expected cash outflows, which is calculated using the cost of capital.