Unformatted text preview: Increases profit by $4100 next year and $7,000 the year after that Project B: Costs $6000 today. Increases profit in two years by $7,100 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) b) Set up (but do not solve) and equation that would find the rate of interest where the firm is indifferent between investing in project B, and not investing in project B. (1 point) c) Explain, based on your calculations in (a), why the rate of return on project A must be somewhere between 6% and 8% (1 points)...
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This note was uploaded on 02/28/2011 for the course ECO 304K taught by Professor Hickenbottom during the Spring '10 term at University of Texas.
- Spring '10