33F Study Guide - European Cooperation In Science And Technology, Opportunity Cost, Capital Asset

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23 Jan 2023
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In this unit, we focus on the concept of the cost of capital as a discount rate and the procedure of its measurement. The opportunity cost of capital (or simply, the cost of capital) for a project is the discount rate for discounting its cash flows. The project"s cost of capital is the minimum required rate of return on funds committed to the project, which depends on the riskiness of its cash flows. Since the investment projects undertaken by a firm may differ in risk, each one of them will have its own unique cost of capital. It should be clear at the outset that the cost of capital for a project is defined by its risk, rather than the characteristics of the firm undertaking the project. The firm represents the aggregate of investment projects undertaken by it. Therefore, the firm"s cost of capital will be the overall, or average, required rate of return on the aggregate of investment projects.

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