You can earn 4% on your bank deposits, but your bank will charge you 8% to borrow money. You are considering a one-year project that will cost $10,000. You have $4,000 that you can
Invest. What minimum rate of return does this project have to offer before you should
Consider investing in it?

Question

Quizplus · Accepted Answer

To determine the minimum rate of return required for the project to be worth investing in, we need to compare the cost of borrowing the remaining $6,000 versus the potential return on the investment.

The cost of borrowing $6,000 for one year at 8% is $480. Therefore, the investment would need to return at least $480 in one year to break even.

If we invest $4,000 at a 4% annual interest rate, we would earn $160 in one year. Therefore, the remaining $6,000 would need to earn at least $320 in one year (to total $480) for the investment to be worth it.

Therefore, the minimum rate of return required for the project to be worth investing in is 5.6%, or higher.

Choice C) (6.4%) is the closest option to this minimum, and therefore the best choice.

You Can Earn 4% on Your Bank Deposits, but Your