riskfree rate= 6 % inflation= 1 % opportunity cost of capital = 18 % With which rate (or combination of rates) do you discount a cash flow to obtain npv?
18%
Why not 17 %?
opportunity cost of capital includes everything.
Do you have a source?
pepp’s common sense.
yeah opportunity cost of capital is what you could if you didn’t invest in this project. so effectively you’d make 18%, hence for the current project you must discount yoru cash flows ATLEAST 18%
what did I tell you?
LOLOL
That’s funny. Somebody else an insight? *Joey, just saw you posting…
The question is: is opportunity cost of capital a nominal or a real measure if it’s real you both are right, if it’s nominal, you have to adjust for inflation…
NOMINAL = REAL + INFLATION REAL = NOMINAL - INFLATION
cfaisok Wrote: ------------------------------------------------------- > riskfree rate= 6 % > inflation= 1 % > opportunity cost of capital = 18 % > > > With which rate (or combination of rates) do you > discount a cash flow to obtain npv? 18% – YOU DO CAP BUDGETING AND HOPE TO GOD YOUR IRR > 18% BABY!
…if you knew inflation was 1% beforehand, then it is already included in your opp. cost. So, it doesn’t make sense to say inflation rate is 1%, and not include it in your opp. cost.
The WACC gives the nominal cost of capital
So opportunity cost is a real measure. Can somebody confirm?
Hey strange, that’S sounds good. As we use nominal WACC, should we adjust for inflation?
cfaisok Wrote: ------------------------------------------------------- > So opportunity cost is a real measure. > > Can somebody confirm? Yes, that is my understanding. Takeaway is that your IRR is supposed to be your cost of capital (ie. discount rate, hurdle rate, WACC, etc) or otherwise you don’t pursue a project.
Is it 17 % or 18 %?