Suppose the interest-rate cost of borrowing rises

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Reference no: EM131159488

Suppose a firm expects that a $40 million expenditure on R&D in the current year will result in a new product that can be sold next year. Selling that product next year would increase the firm’s revenue next year by $60 million and its costs next year by $58 million.

Instructions: Enter your answer as a whole number.

a. What is the expected rate of return on this R&D expenditure? percent.

b. Suppose the firm can get a bank loan at 4 percent interest to finance its $40 million R&D project. Will the firm undertake the project? (Click to select) Yes No.

c. Now suppose the interest-rate cost of borrowing rises to 6 percent. Will the firm undertake the project? (Click to select)NoYes.

d. Now suppose that the firm has savings of $40 million—enough money to fund the R&D expenditure without borrowing. If the firm has the chance to invest this money either in the R&D project or in government bonds that pay 6.5 percent per year, which should it do? (Click to select) Government bonds R&D.

e. What if the government bonds were paying 3.5 percent per year? (Click to select)R&DGovernment bonds.

Reference no: EM131159488

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