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Chapter 4: Q4DQ (page 405)

What is normally used as the discount rate in the net present value method?

Short Answer

Expert verified

Weighted average cost of capital is used as discount rate in net present value method.

Step by step solution

01

Definition of cost of capital

Cost of capital is the rate of return provided by the investment made by the investor in the particular investment opportunity.

02

Discount rate in the net present value method

Net present value method is the capital budgeting technique used by the company for the selection of the investment opportunity. Net present value is the value of the all-future cash inflows generated by the company after discounting with discount rate. Discount rate used is weighted average cost of capital which includes the cost of equity, preferred stock and debt.

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