Solution Matrix • Cost-Benefit-Analysis

Cost of capital

An organization's cost of capital is the cost it must pay to raise funds.

  1. Cost of capital may be taken as the financing cost the company must pay when borrowing funds, either by securing a loan, or by selling bonds.
  2. Alternatively, when evaluating a potential investment (e.g., a major purchase), the cost of capital is considered to be the return rate the company it could earn if it used money for an alternative investment with the risk. That is, the cost of capital is essentially the opportunity cost of investing capital resources for a specific purpose.

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