... needs to be adhered to in order to carry out the valuation correctly. Cost of capital "The minimum acceptable rate of return for capital investments" (Brealey, 2004) When using net present value to guide an investment decision, a firm needs to estimate the future cash flow and the return required by its investors. The return required by the investors is often referred to as the firms 'cost of capital'. According to finance theory the return required depends on the projects risk. Investment projects offering rates of return higher than the cost of capital add value to the firm. Furthermore, projects offering rates of return less than the cost of capital are not worthwhile undertaking financially. Financial management teams within organisations calculate the cost of capital to estimate the beta resulting in the completion of the capital asset pricing model which illustrates the return required by shareholders. Portfolio theory "Overall investment strategy that seeks to construct ...

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