Why is the cost of capital important?

3 years ago
Financial Management

It is important for three reasons:

  1. For proper analysis of capital expenditure decisions, which are of prime importance to a firm, an estimate of cost of capital is required. The cost of capital is the discount rate used in NPV calculations and also the financial yardstick against which rate of return is evaluated.

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  1. Several other decisions like leasing, long ten, financing and working capital policy, require estimates of cost of capital.
  2. In order to maximize the value of the firm the costs of all inputs, including capital input, must be minimum and in this context the should be able to measure the cost of capital.
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Sanisha Maharjan
Sanisha Maharjan
Jan 18, 2022
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