It follows that cost of capital is determined by the yield an investor requires to be compensated for time and risk. In this video, to simplify the exercise and focus on the mechanics of building a model, we assume a cost of capital of 10%. This cost of capital is applied to the projected cash flows of a boat (asset). . This beat V Disclaimer: A Simple Model does not advise buying a boat to fund retirement. This is a terrible plan. (see depreciation) To determine the present value ("PV") of the projected cash flows the concept of a discount factor is introduced: