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In: Economics

When the opportunity cost of capital (or discount rate) increases, how is that increase likely to...

When the opportunity cost of capital (or discount rate) increases, how is that increase likely to affect the economic profitability of a proposed project

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Expert Solution

Economic profitability of a project considers all the explicit and implicit costs that go into it. Time value of money or cost of capital is a critical components of these costs. It also has a direct impact on the net present value of the project.

Hence when the discount rate or cost of capital increases it leads to an increase in economic costs of the project, resulting in the economic profitability of the project going down.

Rahul Sunny answered 2 years ago
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