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 10% and a return on investment of 7%. The company can currently borrow short-term money for 5%.

a. Which of the preceding rates is most relevant to deciding the cost of capital to use? - 7%

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. (Select all that apply.)

A higher cost of capital might be used to recognize the risk associated with proposed capital expenditures.

A higher cost of capital might be used for evaluating capital expenditure opportunities to provide for a margin of error in the estimates used in the capital budgeting calculations.

A lower cost of capital might be used to recognize the risk associated with proposed capital expenditures.

A lower cost of capital might be used for evaluating capital expenditure opportunities to provide for a margin of error in the estimates used in the capital budgeting calculations.