Misaki is considering three options that her company has for investment in capital. The internal rate of return for option A is 4%, for option B is 6%, and for option C is 8%. If the interest rate on borrowed funds is 5%, what would an economist recommend that Misaki do?

Question

Quizplus · Accepted Answer

The economist would recommend investing in options that have a higher internal rate of return (IRR) than the cost of borrowing. Since options B (6%) and C (8%) have higher IRRs than the interest rate on borrowed funds (5%), they are considered good investments. Option A, with an IRR of 4%, is less than the borrowing cost and thus not recommended.

Misaki Is Considering Three Options That Her Company Has for Investment