National Leasing is evaluating the cost of capital to use in its capital budgeting process. Over the

Question:

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 13% and a return on investment of 10%. The company can currently borrow short-term money for 7%.

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 14% to evaluate capital expenditure opportunities.

Capital Budgeting
Capital budgeting is a practice or method of analyzing investment decisions in capital expenditure, which is incurred at a point of time but benefits are yielded in future usually after one year or more, and incurred to obtain or improve the... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...

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