Suppose your firm is considering an investment project that will generate an expected return of 15%.The project costs $200,000.Suppose further that your firm has $200,000 of retained earnings.If the market interest rate is 10%, your firm should

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Investing the $100,000 of retained earnings in the project and borrowing the remaining $100,000 at the interest rate of 10% is the best choice. This is because the expected return of the project is 15%, which is higher than the market interest rate of 10%. By investing the retained earnings in the project, the firm can generate a higher return on this money than by loaning it out at a lower interest rate. Borrowing the remaining funds needed for the project at 10% is a reasonable cost for the firm, as the expected return on the project is higher. This approach will allow the firm to maximize its return on investment while still maintaining financial stability.

Suppose Your Firm Is Considering an Investment Project That Will