If you were evaluating an investment opportunity, which technique would you use and why? The weighted average cost of capital can consist of debt, preferred stock and equity. Which of these sources is the most expensive and the least expensive and why?

1. Net Present Value

First off it is important to note that every investment is different and should be evaluated by a method that will take into account it uniqueness. However, I would choose the Net Present Value method of evaluation because it combines some very useful features from other methods to make it the best one in general.

The Net Present Value checks when an project will be able to pay back the investment that was put into it given the cash inflows from the project and it uses the present value of the cash inflows to do so. This means that in using the NPV method, the time value of money is factored in so that real analysis can be done.

The risk factor of the project is also reflected in the rate used which will enable one know if it is a project they would be interested in in case the rate is too high considering their company's cost of capital.

2. The most expensive form of capital is Equity. This is because it does not have a fixed cost and this varies depending on the profits that the company makes. It is also not tax deductible like debt.

The least expensive form of capital is Debt. Debt has a fixed rate which can be planned for. It is also tax deductible which means that paying off debt reduces tax expense thus making it cheaper.

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