Economics Capital Budgeting Questions
The cost of capital refers to the average rate of return that a company must earn on its investments in order to satisfy its shareholders and investors. It is important in capital budgeting because it helps determine the feasibility and profitability of potential investment projects. By comparing the expected returns of a project with the cost of capital, companies can assess whether the project will generate enough returns to cover the cost of financing and meet the required rate of return. This information is crucial for making informed investment decisions and allocating resources effectively.