How is the Risk-Free Rate Used in Business Decisions?
Businesses use the risk-free rate in various ways, including:
Investment Appraisal: Companies use the risk-free rate as a baseline to evaluate the attractiveness of new investment opportunities. Capital Budgeting: The risk-free rate is used in the Net Present Value (NPV) and Internal Rate of Return (IRR) calculations to assess the viability of long-term projects. Cost of Capital: The risk-free rate is a component in calculating the Weighted Average Cost of Capital (WACC), which is used to determine the company's cost of financing.