Accounting: What the Numbers Mean 11th Edition by Wayne McManus,Daniel Viele,David Marshall

Exercise 31

Present value analysis-cost of capital National Leasing is evaluating the cost of capital to use in its capital budgeting process. Over the recent past, the company has averaged a return on equity of 12% and a return on investment of 9%. The company can currently borrow short-term money for 6%.
Required:
a. Which of the preceding rates is most relevant to deciding the cost of capital to use? Explain your answer.
b. Without prejudice to your answer to part a , explain why the company might choose to use a cost of capital of 13% to evaluate capital expenditure opportunities.