Youre the newly hired CFO of a small construction company. The privately held firm is capitalized with
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The owner has called you in and confessed to being confused about the projects. He instinctively feels that some are financially marginal and may not be beneficial to the company, but he doesn’t know how to demonstrate this or how to choose among the projects that are financially viable. Assuming the owner understands the concept of return on investment; write a brief memo explaining the ideas of IRR and cost of capital and how they can solve his problem. Don’t get into the detailed mechanics of the calculations, but do use the figures given above to make a rough estimate of the company’s cost of capital and use the result in your memo.
Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
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