Cost of Capital for Resource Projects

The cost of capital is the rate at which a project's cash flow should be discounted to obtain the Net Present Value. The cost of capital is a weighted average of both debt and equity funds of a company, on an after tax basis. Two methods are described for calculating a company's cost of equity, the Dividend Valu- ation Model and, more importantly, the Capital Asset Pricing Model. A worked example is presented where the cost of capital was obtain- ed for two resource companies. The application of the cost of capital was illustrated by way of a mining equipment replacement problem. The paper outlines refinements and problems that may be encountered with the use of the cost of capital, and concludes that it is an integral part of any project evaluation.