1. Rambo Exterminator Company bought a “Bug Eradicator” in April of 2008 that provided a return of 7 percent. It was financed by debt costing 6 percent.

In August, Mr. Rambo came up with an “entire bug colony destroying” device that had a return of 12 percent. The chief financial officer, Mr. Roach, told him it was impractical because it would require the issuance of common stock at a cost of 13.5 percent to finance the purchase. Is the company following a logical approach to using its cost of capital?