BGA1 Task 4 308.1.8-05,12

The weighted average cost of capital for this company is 9.48%.

Cost of capital is often used in net present value analysis as the discount rate, which is the rate that other investments would return that have similar risks. Cost of capital is the total of all of the actual costs of a company’s debts and equities. These costs include such factors as interest, tax expense, and equity costs. It is what percentage it costs the company to tie up its capital, so in order for an investment to be desirable, it must return a percentage greater than what it takes for the company to cover its capital costs. In a net present value analysis, the cost of capital is used to locate the factor from the present value table that will be multiplied by the cash flow to determine the present value of that cash flow. The present values of all of the cash flows will then be compared to the total investment to determine if it is an acceptable investment. If the present value is equal to or greater than the total investment, then the investment will likely be accepted. If the present value is less than the total investment, the investment should not be accepted.

Cost of capital is used in the internal rate of return analysis by comparing the internal rate of return calculation to the cost of capital calculation. If the internal rate of return figure is equal to or greater than the cost of capital figure, then the investment is acceptable. If the internal rate of return figure is less than the cost of capital figure, then the investment is not acceptable, because its return will be less than what it costs to make the