Final answer:
The interest rate used to capitalize interest on self-constructed assets with no specific borrowing when other debt exists is the weighted-average rate on all loans outstanding, representing the opportunity cost of the funds used.
Step-by-step explanation:
For self-constructed assets, if no specific money is borrowed to construct the asset but other debt is outstanding, the interest rate used to capitalize interest is the weighted-average rate on all loans outstanding. This is the cost associated with the funds that the company uses for the construction of the asset. The interest rate used reflects the opportunity cost of the funds employed, corresponding to the return the company would have otherwise generated had the funds been used for another purpose.
Companies engage in capitalization of interest as a part of the cost of the constructed asset when specific borrowing is not undertaken but other debts exist. The rate used is not zero since this ignores the time value of money and the opportunity cost associated with the use of the funds. The rate is also not solely the incremental borrowing rate nor the risk-free rate as these may not adequately reflect the cost of capital for the firm.