Project Management

SUMMARY: The cost of capital is the minimum rate of return the firm must earn on its investments in order to satisfy the various categories of investors who have made investments in the form of shares, debentures, term loans, etc. It is necessary to calculate the cost of capital to know the discount rate. The cost of capital is used for discounting the future cash flows. There are various sources of finance like equity capital, preference capital, debentures, retained earnings, and term loans. After calculating the costs of various sources of finance, weights based on their proportion in the total capital structure of the firm should be determined in order to calculate the weighted average cost of capital. It is necessary to calculate the cost of capital for appraising a project in order to compare the investment made and the benefits derived from it when compared to another project