Final answer:
The Internal Rate of Return (IRR) is a measure of investment profitability. To determine the maximum deviation in the cost of capital estimate, you subtract the estimated cost of capital from the IRR.
Step-by-step explanation:
In finance, the Internal Rate of Return (IRR) measures the profitability or attractiveness of an investment by calculating the discount rate that makes the net present value (NPV) of the investment equal to zero. It is a useful tool in capital budgeting decisions. To determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged, we would compare the IRR to the cost of capital estimate and calculate the percentage difference.
Example:
Let's say the IRR of an investment project is calculated to be 12% and the estimated cost of capital is 10%. To determine the maximum deviation allowable, we can subtract the estimated cost of capital from the IRR:
Maximum Deviation Allowable = IRR - Estimated Cost of Capital
= 12% - 10%
= 2%
Therefore, the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged is 2%.