Risk and Cost of Capital Talich New World Industrial company is considering investing in an automated welding system. The system employs a 300 -watt laser with fiber optic beam delivery to weld dissimilar metals. The specifications of the system indicate that it can make hundreds of welds per minute-significantly faster than the company's current welding equipment-and improve the quality of welds.

In the recent past, Talich has evaluated investments using a 12 -percent cost of capital. However, the automated welding system is not in general use and, while the company expects that it will result in significant labor savings and improve quality leading to increased sales, the cash flows are not at all certain.

Required
Assume that the cash inflows associated with the automated welding system are more risky than those associated with the company's typical investment. Should the company evaluate the investment using the cost of capital of 12 percent, or should a higher or lower rate be used? Briefly explain the basis for your answer.