Companies evaluating capital investment projects frequently use net present value analysis to make decisions about which projects are likely to be the most profitable. Cash flows are projected for future periods and then discounted to the present. A common rate to use when discounting these cash flows is the:

Question

Quizplus · Accepted Answer

The weighted cost of capital is a common rate used to discount cash flows in net present value analysis. It represents the average cost of financing a company's operations and includes both debt and equity components. Using the weighted cost of capital as the discount rate ensures that the cash flows are adjusted for the time value of money and the expected return on invested capital. The internal rate of return is a related metric used to evaluate a project's profitability, but it represents the rate at which the project's cash flows equal its initial investment. The prime rate of interest and accounting rate of return are not commonly used as discount rates in net present value analysis.

Companies Evaluating Capital Investment Projects Frequently Use Net Present Value