Suppose that a firm has an opportunity to invest $100,000 in a project that over its one year life is likely to yield $115,000 in revenue.To maximize its return on investment the firm should:

Question

Quizplus · Accepted Answer

The firm should finance the investment through borrowed funds if the interest rate is 15 percent or less. This is because the project is likely to yield a return of $15,000 ($115,000 - $100,000) over one year, which translates into a return on investment of 15 percent. Therefore, if the interest rate is less than or equal to 15 percent, borrowing funds to finance the investment would still result in a positive net return on investment. If the interest rate is higher than 15 percent, the cost of borrowing would exceed the return on investment and the firm would be better off not investing in the project.

Suppose That a Firm Has an Opportunity to Invest $100,000