Answer to Question #274078 in Accounting for enny

Question

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

Answer 1

Cost of capital means the cost of a company's funds that it usually use to finance its assets and business projects. It is also defined as the weighted average of the company's cost of internal and external financing sources such as borrowings, bonds, equity etc.

Cost of capital has greater relevance in net present value (NPV) analysis when evaluating projects. It is used as discount rate to determine present value of a project's estimated cash flows, which is significant to measure its economic viability for the company.