The cost of capital is the return, expressed in terms of an interest rate, required by an organization to finance its activities. It can vary depending on the types of capital employed, such as equity share capital or loan capital. A unique weighted average cost of capital (WACC) is often computed for each organization based on their specific mix of capital sources. The cost of capital is frequently used as a hurdle rate in discounted cash flow calculations.
An interest or cost of capital rate applied to discount factors in discounted cash flow (DCF) appraisals, used in determining the present value of future cash flows.
A financial metric used in discounted cash flow analysis to rank potential projects based on their profitability.
In a discounted cash flow (DCF) calculation, a standard cash flow pattern is characterized by an initial cash outflow followed by subsequent cash inflows, with no net cash outflows in subsequent years. This pattern, though useful in projections, is relatively rare in practice.
