c)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 invest? Show your work.

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c)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 invest? Show your work.

orangeherring233

1. Consider the following two projects

Project A: Costs $10,000 today. Increases profit by $4000 next year and $7,200 the year after that

Project B: Costs $6000 today. Increases profit in two years by $6678

A firm faces a rate to borrow money of 8% and has the option of investing money with almost no risk at 6%.

a) If the firm has $20,000 on hand, with only these two project to choose from, will they invest in A, B, neither or both? Show the calculations that lead to your conclusions. Explain whether you answers would be different for either project if the firm had no money on hand to invest. (2 points)

violetdinosaur630

You have an opportunity to acquire an office building for $1 million. The annual net revenue from operations is expected to provide an after-tax profit of 9% annually on this million dollar investment. If you like, you could arrange to finance 80% of the purchase price with an 8% line of credit from your bank. They will let you borrow $800,000 and just pay the interest each year for an indefinite period. Your effective tax rate is 40% and there is no inflation. a. What is your annual before-tax profit if you do not borrow any money? b. What is your annual before-tax profit if you do borrow the $800,000? c. What is your annual after-tax profit if you borrow the $800,000? d. What is your ROI on your equity investment of $200,000 if you borrow the money? e. Comment: What do you gain and what do you lose if you borrow the money?

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c)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 invest? Show your work.

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