Explain why the cost of capital is referred to as the ?ohurdle?? rate
QUESTION
Explain why the cost of capital is referred to as the ?ohurdle?? rate in capital budgeting.
The project is accepted only when the cash flows discounted at the cost of capital results in the positive net present value. A positive net present value implies that the project will earn a return which will be higher than the minimum return. Thus the cost of capital is referred to as the hurdle rate because the return on a project must be higher than this rate so that it is accepted.
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