Joe's Better Bike Company has $5 million in cash, which it has accumulated from retained earnings. It was planning to use the money to build a new factory. Recently, the rate of interest has increased. How does this fact influence the company's decision?

Question

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When the interest rate increases, the opportunity cost of holding on to cash also increases. The company could have invested the $5 million elsewhere and earned a higher return than the interest rate. Thus, it is less likely that Joe's Better Bike Company will use the cash to build the factory, as the opportunity cost of using the cash for this purpose is now higher.

Joe's Better Bike Company Has $5 Million in Cash, Which