You can earn 4% on your bank deposits, but your bank charges you 9% to borrow
money. You are
considering a project that will cost $5,000 and will return 8% in one year. You have
$2,000 that you can invest. Should you undertake this project?

Question

Quizplus · Accepted Answer

The Answer is Yes. To undertake the project you must borrow $3,000 at 9%. You will owe $3,000(1.09)= $3,270 at the end of the year. You will have earned $5,000(1.08)= $5,400 on the project, so you will net $5,400 - $3,270 = $2,130. If, instead, you deposit your $2,000 in the bank at 4%, you will have only $2,000(1.04)= $2,080.

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