A firm wants to borrow funds to purchase a new piece of equipment that costs $20,000 and has a useful life of one year. The investment is expected to produce an additional $1,500 in total revenue. The firm will most likely make the investment if the interest rate is

Question

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At a 6 percent interest rate, the cost of borrowing $20,000 would be $1,200 (6% of $20,000), which is less than the additional revenue of $1,500 expected from the investment. Therefore, the firm is likely to proceed with the investment as it would still result in a net gain.

A Firm Wants to Borrow Funds to Purchase a New