List and Briefly Describe the Six Steps in Estimating a Cost

question 132

Essay

List and briefly describe the six steps in estimating a cost function under quantitative analysis.

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Definitions:

Discount Rate

The interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility.

Opportunity Cost of Capital

Opportunity Cost of Capital is the return that is forgone by investing in a project instead of in comparable financial securities or projects with a similar risk profile.

Net Present Value

A calculation used to assess the profitability of an investment, measuring the difference between the present value of cash inflows and the present value of cash outflows over time.

Opportunity Cost of Capital

The potential return lost by investing capital in one project instead of another with a higher return.