The minimum desired rate of return for an investment under the NPV method is based on the cost of capital.

Question

Quizplus · Accepted Answer

The minimum desired rate of return for an investment under the NPV method is based on the cost of capital, which represents the opportunity cost of using funds to invest in the project instead of alternative investments. The cost of capital reflects the required return that investors and lenders are expecting to receive based on the riskiness of the investment and the prevailing market conditions. Therefore, the NPV method compares the present value of the expected cash flows with the initial investment and uses the cost of capital as the discount rate to calculate the net present value of the investment. If the NPV is positive, the investment is expected to generate a return higher than the cost of capital, indicating that it creates value for the investors.

The Minimum Desired Rate of Return for an Investment Under