What is wrong with using the cost of the specific capital used to finance a project...

What is wrong with using the cost of the specific capital used to finance a project as
the discount rate in relation to that project?

Solutions

Expert Solution

Before investing in any project, it is significant to evaluate whether the project would be economically beneficial or not. The best way to evaluate this is comparing the Initial Cash out flow of the project with the Discounted cash flows likely to be received from the project over the life of the said project.

Now, the most important factor in this evaluation is to ascertain the proper Discount Rate. Considering the cost of capital used to finance the project and discounting the future cash inflows with this rate shall give the best picture about economic viability of the project.

Overall cost of capital represents the cost running routine business activities. Whereas, Specific cost of capital represents the true cost for the specified project. If the cost of specific cost used to finance the project is high, then it will require higher cash inflows to accept the said project and vice versa.

jeff jeffy answered 1 month ago

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