Question
The cost of capital serves as a screening device in net present value analysis
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GPT-4o mini
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The cost of capital is used in net present value (NPV) analysis to determine the discount rate at which future cash flows are evaluated. It effectively acts as a screening device by helping to assess whether an investment or project will generate returns that are higher than the cost of obtaining capital. If the NPV is positive (i.e., if the returns exceed the cost of capital), the project may be considered viable; if negative, it may be rejected.
The cost of capital is used in net present value (NPV) analysis to determine the discount rate at which future cash flows are evaluated. It effectively acts as a screening device by helping to assess whether an investment or project will generate returns that are higher than the cost of obtaining capital. If the NPV is positive (i.e., if the returns exceed the cost of capital), the project may be considered viable; if negative, it may be rejected.