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.
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