Businesses borrow when they expect the return on their investment to be greater than the interest rate.

Question

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Businesses borrow money as a means of financing their operations or expanding their business. They expect to make a return on their investment that exceeds the cost of borrowing (i.e., the interest rate). This is known as a "positive net present value." Thus, borrowing is considered a good financial decision when the anticipated return on investment is greater than the interest rate.

Businesses Borrow When They Expect the Return on Their Investment