Economics Capital Budgeting Questions
The risk-free rate is used as a benchmark to determine the minimum rate of return that an investment should generate in order to be considered worthwhile. It is used in capital budgeting analysis to discount future cash flows and calculate the net present value (NPV) of an investment. By discounting future cash flows at the risk-free rate, the analysis takes into account the time value of money and the opportunity cost of investing in a particular project. The risk-free rate helps in evaluating the profitability and feasibility of investment projects by providing a reference point for comparing the expected returns of different investments.