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The approach uses a weighted average cost of capital that is unique to a particular project while determining the appropriate discount rate.
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- Define each of the following terms: f. Risk-adjusted discount rate; project cost of capitalDistinguish between goal weights and historical weights in terms of how they are used to compute the weighted average cost of capital (WACC) and how they differ from one another. What is the recommended weighting system, and why is it favored?The cost of capital represents a. the capital outlay required in a project. b. the initial investment of a project. c. the IRR of the investment. d. the minimum ROI of the investment.
- Weighted average cost of capital (WACC) reflects the average cost of all capital components proportional to their use in the overall cost of the project. true or false?Outline the limitations of the capital asset pricing model as a method for obtaining discount rates for the purposes of capital budgeting.Differentiate between the Net Present Value method and Internal Rate of Return method of capital budgeting. Please give an explanation with an example for each method.
- The difference between APV approach, NPV approach and Weighted Average Cost of Capital approach to estimating the value of project.Answer the following question: Why should the cost of capital used in capital budgeting be calculated as a weighted average of the capital component rather than the cost of the specific financing used to fund a particular project?Describe the advantages and disadvantages of several capital budgeting methods.
- Relate the idea of cost of capital to the opportunity cost concept. Is the cost of capital the opportunity cost of project money?Explain why opportunity costs and externalities should be included in capital planning but not sunk costs. Exemplify each.Why should the cost of capital used in capital budgeting be calculated as a weighted average of the capital component rather than the cost of the specific financing used to fund a particular project?
