<P> In economics and accounting, the cost of capital is the cost of a company's funds (both debt and equity), or, from an investor's point of view "the required rate of return on a portfolio company's existing securities". It is used to evaluate new projects of a company . It is the minimum return that investors expect for providing capital to the company, thus setting a benchmark that a new project has to meet . </P> <P> For an investment to be worthwhile, the expected return on capital has to be higher than the cost of capital . Given a number of competing investment opportunities, investors are expected to put their capital to work in order to maximize the return . In other words, the cost of capital is the rate of return that capital could be expected to earn in the best alternative investment of equivalent risk; this is the opportunity cost of capital . If a project is of similar risk to a company's average business activities it is reasonable to use the company's average cost of capital as a basis for the evaluation . However, for projects outside the core business of the company, the current cost of capital may not be the appropriate yardstick to use, as the risks of the businesses are not the same . </P>

A company’s required rate of return typically its cost of capital is called the