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COST OF CAPITAL & CAPITAL INVESTMENT APPRAISAL
Introduction
• Capital investment appraisals are long-term decisions,
where it will take several years to earn a return on the
capital investment made.
• The topic of capital investment appraisals integrates
many other management accounting topics (including
strategy, cost of capital and relevant costing), and
frequently serves as the precursor to the financing
decision.
• It further integrates with the subject of taxation.
• The cost of capital is important as it directly affects the
choice of investments.
• A too low cost of capital could lead to the acceptance
of investments earning insufficient returns; whereas a
too high cost of capital could lead to not accepting
profitable investments.
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