A firm expects to have funds of $150,000 idle for 60 days.If the firm could purchase marketable securities yielding 2 percent and pay brokerage fees of $1,500,the firm ________.
A)should make the investment since interest earned exceeds brokerage fees
B)should not make the investment since the required rate of return is less than the cost of investment
C)should leave the $150,000 in cash
D)should invest the funds for more than 60 days due to the favorable rate

Question

Quizplus · Accepted Answer

By investing in marketable securities, the firm can earn an interest of 2 percent on the idle funds, which amounts to $3,000 ($150,000 x 0.02). Even after deducting the brokerage fees of $1,500, the net return is $1,500 ($3,000 - $1,500), which is higher than the return from leaving the $150,000 in cash. Therefore, the best choice for the firm is to make the investment, as the interest earned exceeds the brokerage fees.

A Firm Expects to Have Funds of $150,000 Idle for 60