Definition of "Cost of capital"

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Rate of return that is necessary to maintain market value of a real estate project. The cost of capital is used for project evaluation purposes. Under the net present value method, the cost of capital is used as the discount rate to calculate the present value of future cash inflows derived from the real estate project. Under the internal rate or return method, it is used to make an accept-or-reject decision by comparing the cost of capital with the internal rate of return on a given project. A project is accepted when the internal rate exceeds the cost of capital. see also hurdle rate; cutoff rate; minimum required rate of return.

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