Econ Micro (book Only)
6th Edition
ISBN: 9781337408066
Author: William A. McEachern
Publisher: Cengage Learning
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Question
Chapter 13, Problem 2P
To determine
To find:
The marginal cost of investing in the firm when we are given the expected
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Question- A firm is considering an investment that will earn a 6% rate of return. If it were to borrow the money, it would have to pay 8% interest on the loan, but it currently has the cash, so it will not need to borrow. Should the firm make the investment?
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23. Joe's Build Back Better (BBB) Ammo Corp has $15 million in cash, which it has
accumulated from retained earnings. It was planning to use the money to build a new
factory. Recently, the interest rate has increased. How does this influence the company's
decision, assuming the alternative to investing in a factory is loaning the money out?
(A) It doesn't, since the company's shareholders are expecting a new factory.
(B) It is more likely to build the factory because a higher interest rate makes the
factory more valuable.
(C) It is less likely to build the factory, since the opportunity cost of using the funds
to build a factory rises with a higher interest rate.
(D) It doesn't influence their decision, since the company does not need to borrow
money to build the factory.
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