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Corperate Finance: Cost of Capital Calculations

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I need some help getting started with the following:

A) How does the cost of capital calculations impact on investment decisions?

B) While most financial professionals are very comfortable with the textbook calculation, there are a few gray areas worthy of note because of their potential impact on capital budgeting decisions. Discuss

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This solution emphasizes the importance of cost of capital calculations for determining investment decisions. Additionally, this solution discusses factors that might affect business decisions after the textbook calculations have been completed.

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A. How does the cost of capital calculations impact on investment decisions?

The importance of cost of capital calculations cannot be underestimated for comparative purposes. Granted that the calculations assume certain estimates and forecasts, but they can still be very valuable for comparison when the same assumptions are applied to a set of projects. Limited capital is always a consideration in business, and the choices of uses of that capital are critical to future success.

B. While most financial professionals ...

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