The cost of capital used in capital budgeting should reflect the average cost of the various sources of long-term funds a firm uses to acquire assets.

Question

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The cost of capital used in capital budgeting should reflect the weighted average cost of capital (WACC), which is the average cost of the various sources of long-term funds a firm uses to acquire assets. The WACC takes into account the proportion of each type of funding used by the firm and the cost of each type of funding.

The Cost of Capital Used in Capital Budgeting Should Reflect