INVESTMENT CRITERIA AND THE COST OF CAPITAL.

The article presents information on investment criteria and the cost of capital. According to elementary economic theory, profit is maximized when marginal revenue equals marginal cost. By adapting this doctrine to the capital budgeting situation, we get the theory that a company's investment program should be expanded to the point where the return from the last dollar invested equals the cost of raising that dollar. This suggests that a rational decision to accept or reject a particular investment opportunity can be made consistently. Unless the rate of return exceeds the cost of raising funds in the capital market and offer should be rejected.