Question

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.

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 .