Question

12. Allen Steel Company is considering whether to build a new mill. If the interest rate falls, a. the present value of the returns from the mill will fall, so Allen will be less likely to build the mill. b. the present value of the returns from the mill will fall, so Allen will be more likely to build the mill. c. the present value of the returns from the mill will rise, so Allen will be less likely to build the mill. d. the present value of the returns from the mill will rise, so Allen will be more likely to build the mill.

Answer 1

Answer:

Allen Steel Company is considering whether to build a new mill. If the interest rate falls,

d. the present value of the returns from the mill will rise, so Allen will be more likely to build the mill.

Explanation:

A fall in the interest rate payable by Allen Steel Company will increase the present value of the returns that it can generate from building a new mill financed with debt.  This is an incentive for investors to build more capital assets to increase productive activities in the economy.  This is why the fall will most likely encourage Allen to build the mill.