c) A firm is considering an investment that will earn a 6% rate of return. If it were to borrow the money, it would have to pay 8% interest on the loan, but it currently has the cash, so it will not need to borrow. Should the firm make the investment? Show your work.

Question

Josiah Mcintyre

Mathematics

12 August, 03:21

c) A firm is considering an investment that will earn a 6% rate of return. If it were to borrow the money, it would have to pay 8% interest on the loan, but it currently has the cash, so it will not need to borrow. Should the firm make the investment? Show your work.

+3

Answers (1)

Know the Answer?

Genevieve Clarke · Answer 1

no the firm will not do the investment. because if the firm borrows the money & invest it in the project then the return will be 6% but the cost is 8%. so it will lose 2%.

it also should not invest his own money on the project to get get the 6% return. because he could have loan the money to someone else & get 8% return. therefore his opportunity cost of investing the money is greater than the return.

therefore he should not make the investment.