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Hello,
can anyone please explain the meaning of following linesIn theory, a firm will have accepted all projects which provide a return in excess of the
cost of capital. Any other funds which become available can only be reinvested at the cost of capital. This
is the assumption implied in the NPV rule, but is unlikely to be the case in practice.
thanks in anticipationif Cost of Capital is 10%, co needs to earn more than 10% to be profitable. Agree ?
Reinvestment Assumption :
If company has excess funds, where will it invest ? In a project that has a return of at least 10% otherwise company will make a loss.
What if all available projects generate < 10% ? Co will still invest bcuz something is better than nothing. right ? NPV isn’t aware of that proverb. lol
Hope that helps.
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