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CAPM is a technique or method used by investors to estimate the required rate of return on their future investments. It enables directors of a firm to appraise a new investment project on behalf of the company's shareholders. It provides an approach to establish the cost of equity of a firm, taking into account of the risk characteristics of the company's investments, the business and financial risk.
When the business risk of an investment project differs from the business of the investing company, the return required on the investment project is different from the average return required on the investing company's existing business operations. This means that it is not appropriate to use the investing company's existing cost of capital as the discount rate for the investment project. Instead, CAPM can be used to calculate a project-specific discount rate that reflects the business risk of the investment project.
In short capital asset pricing model method can give the value which can be used as a discount rate.
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