Assume that your firm has a potential investment project which generates a return of 15% and has a cost of $200,000. Assume further that your firm has $200,000 of retained earnings and that the market interest rate is 10%. In this case, your firm should

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The potential investment project generates a return of 15%, which is higher than the market interest rate of 10%. Therefore, investing the $200,000 of retained earnings in the project would generate a higher return than loaning it out at either 5% or 10%. Choosing option C to loan the retained earnings out at 15% is not feasible as it is unlikely to find a borrower willing to pay such a high interest rate.

Assume That Your Firm Has a Potential Investment Project Which