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Weighted average cost of capital, defined as the overall cost of capital for all funding sources in a company, is used as commonly in private businesses as it is in public businesses. A company can raise its money from three sources: equity, debt, and preferred stock. The total cost of capital is defined as the weighted average of each of these costs.
That means the required return on capital is 8.3%. A company pays 8.3% interest for every dollar it finances.
Where: CF = A one-time cashflow r = the Discount Rate t = the time of the cashflow
The rate of return (r) for which NPV = 0 is the internal rate of return calculator. So, if: 0 = (Cash flow in period 1 / (1 + IRR) ^1) + (Cash flow in period 2 / (1 + IRR)^2) + (Cash flow in period 3 / (1 + IRR) ^ 3) + ... Where: NPV = Net Present Value CF 1, 2, or 3 = Cash flow in period 1, Cash flow in period 2, Cash flow in period 3, etc. IRR = Internal Rate of Return