If the firm in the previous question finds it can borrow funds at an interest rate of 10 percent the firm should:
A) not purchase the machine because the expected rate of return exceeds the interest rate.
B) purchase the machine because the expected rate of return exceeds the interest rate.
C) not purchase the machine because the interest rate exceeds the expected rate of return.
D) purchase the machine because the interest rate exceeds the expected rate of return.

Question

Quizplus · Accepted Answer

If the firm can borrow funds at an interest rate of 10 percent and still expects to earn a return of 15 percent by purchasing the new machine, it is better off borrowing the funds and purchasing the machine since the expected rate of return exceeds the interest rate.

If the Firm in the Previous Question Finds It Can