Watch the video posted for this week “what is cost of capital” and explain what is the relation between that and ‘hurdle rate’ companies consider when they decide on a project?
by Guilherme Vasconcelos The cost of capital is basically the return that the best asset would give you under the same risks. If you are deciding either buying or not an asset, you have to see what is the projected return to the other assets with the same risk. The asset with the best return under the same risk will be the cost of capital. So, the cost of capital is very similar to opportunity cost, but more related to the capital market.The hurdle rate is the lowest rate of return for the project or investment required by the manager or investor. Hurdle rates enable enterprises to choose whether or not to pursue a certain project.So, managers can use the cost of capital to decide whats is the hurdle rate of an investment. The hurdle rate has to be at least the same as the cost of capital, otherwise, it is better to invest the money in other assets or projects.
by Thanyathorn Lapthitisate The cost of capital is the cost of equity is the rate of return that investors require to make an equity investment in a firm. The cost of capital is the rate of return expected by the investor who provides wealth for the business. So, the Cost of Capital is the cost of the issue of equity or debt. E.g. Interest Rate for Debt or required rate of return for investment. The hurdle rate can be defined as the minimum rate of return that a company expects to earn when investing in a business. The cost of capital is used as the hurdle rate for companies because it’s a blend of the cost of debt and the cost of equity. To add to it, it also plays an essential role in economic value added (EVA) calculations. The investors use Cost of capital as a tool to decide whether to invest in a project or not, and it acts as a hurdle rate for companies. The value of the discounted rate depends on the standard used in discounting future cash flows. That rate is the hurdle rate. The general cost of the project is subtracted from that rate to get the net present value of the project. If the NPV is positive, the company will approve the plan.218 words