An investment project has an expected profit rate of 12 percent.The going rate of interest is 12 percent.Firm X would need to borrow money to carry out this project;firm Y would use its own funds.Which statement is true?

Question

Quizplus · Accepted Answer

Since the going rate of interest is equal to the expected profit rate, the project would not generate a positive net present value (NPV) for either firm. Firm X would have to pay interest on the borrowed capital that would cancel out the expected profit, and Firm Y would have an opportunity cost by investing its own funds at the same rate of return as the project. Therefore, neither firm would undertake this project.

An Investment Project Has an Expected Profit Rate of 12