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Cost of Capital

Cost of capital is the minimum return required to justify investing money into inventory, reflecting both the cost of borrowed funds and the opportunity cost of your own capital.

Why It Matters

•Establishes the baseline for evaluating whether a SKU creates or destroys value.
•Prevents investment into products that yield attractive margins but poor financial returns.
•Helps compare products with different margins and cycle times on equal terms.
•Essential when financing costs rise or cash becomes constrained.

Connection to Capital

If expected returns on investment from a SKU are lower than your cost of capital, the investment decreases total capital value.

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