Concept
The cost of capital is the minimum annual return a project must earn to justify the money tied up in it — the blended required return of the debt and equity that finance it. It’s the discount rate that time-value calculations like the capital recovery factor and discounted cash flow apply to a project’s capital. It comes from the capital markets and the project’s risk, not from the chemistry.
Where the number comes from — WACC. Funding comes from debt and equity, each with its own required return; the cost of capital is their weighted average — the weighted average cost of capital (WACC):
E D
WACC = ───────·rₑ + ───────·r_d
E + D E + Drₑ = cost of equity, r_d = cost of debt, E and D = the equity and debt amounts (the capital structure / gearing). Equity is dearer than debt because equity holders are paid last, so a more highly geared project has a lower WACC. (The fuller form multiplies the debt term by (1 − tax rate) for the interest tax shield.)
What sets its level — risk. The cost of capital rises with the uncertainty of the cash flows. Rough magnitudes by risk class:
The same plant can be financed at very different rates depending on who builds it and how proven it is — a property of the financing, not the process.
How it enters a TEA. It’s the discount rate i in every time-value step: through the CRF it annualizes total capex into a yearly charge and sets the capital share of levelized cost; in a DCF it’s the rate each year’s cash flow is discounted at, and the threshold the IRR is judged against. Because the capital share of a capital-heavy route moves almost proportionally with it, the discount rate is a standard axis in a one-way sensitivity and a frequent top driver. At the maturity anchor, enter it as a single assumed round hurdle rate, not built up from a capital structure an early project hasn’t settled.