Unused capital budget funds are assumed to earn the same rate of return as the average cost of capital for the firm.In other words they may be invested in $0.0 NPV projects.(Or,alternatively,excess funds may be returned to creditors and shareholders.)

Question

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Unused capital budget funds are not generating any return for the firm and therefore, it is assumed that they will earn the same rate of return as the average cost of capital for the firm. Alternatively, if there are excess funds, they may be returned to creditors and shareholders, as they are not generating any value for the firm. Thus, unused capital budget funds may be invested in $0.0 NPV projects, as they are not expected to generate additional returns for the shareholders.

Unused Capital Budget Funds Are Assumed to Earn the Same