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How do I figure out the cost of capital? The problem tells me it is 14%,...

How do I figure out the cost of capital? The problem tells me it is 14%, but I don't understand where the decimals come from

Introduction to corporate finance

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Answer #1

cost of capital is one of the decisions making parameters in capital budgeting problems. Specifically it is required to calculate the NPV i,e Net present value of the firm.

We have to discount all future cash flows using the cost of capital to get the present value of cash flows

PV of Future cash flows, ( Assuming Project is for 03 Years)

Here C1 = Cash Flow for Year 1

C2 = Cash Flow for Year 2

C3 = Cash Flow for Year3

r = Cost of Capital for Your example it is 14% = 14% = 14 / 100 = 0.14

So for Denominator terms we always use 1+r as a formula . So 1+r = 1 + 0.14 = 1.14

Now , PV of Future cash flows

converting into decimal Just we have to divide Interest Rate by 100 = r / 100 = 14 / 100 = 0.14

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