Cost of capital is all about ensuring that both owners and investors benefit from a firm. In the decision between two equal risk investments, the owners/investors of companies calculate the capital cost and pick typically the return-added cost.

Let us suppose that the company XYZ is deciding whether it should refurbish or acquire equally risky bonds in its warehousing systems.

The refurbishment will cost $50 million and $10 million is scheduled to be saved annually in the following 5 years. Company XYZ may also purchase 5-year bonds at company ABC for $50 million (which are expected to return 12 percent per year).

It will be retrofitted 20% year ($10,000,000 / $50,000,000). The projected return in this situation is a risk. The remodeling is the better capital use since the profit of the Company XYZ exceeds 12 percent due to investments in Company ABC.