Chapter 12, Problem 16Q

To determine

Cost of capital:

Cost of capital refers to the opportunity cost that the business makes the investment in the specific long-term asset. Cost of capital is like an expense of the business for its borrowed fund, and that the amount of expense paid to the creditors as a name of interest, and the stockholders as a name of dividend and any additional benefits.

The internal rate of return method:

The internal rate of return method is one of the capital investment methods which determine the rate of return wherein the net present value of all the cash flows (both positive and negative) from an investment is zero. This method also called as the time-adjusted rate of return method, and it used to evaluate the different proposal’s expected rate of return.

To discuss: The meaning of cost of capital, and the decision rule under the internal rate of return technique.