Final answer:
The firm should make the investment as the rate of return at 6% is higher than the would-be borrowing interest rate of 8%. Since the firm has sufficient cash, it avoids borrowing costs, thereby making the investment beneficial.
Step-by-step explanation:
The student's question revolves around the concept of calculating rates of return in a business or financial context. Specifically, it considers whether a firm should invest in an opportunity that offers a rate of return, taking into consideration the cost of capital and the potential interest rates that would apply if the funds were borrowed instead of being available in cash.
Beginning with problem 39, the firm is considering an investment with a 6% return. Since the firm has the cash and does not need to borrow at an 8% interest rate, the firm should make the investment because the rate of return on the investment is higher than the interest rate it would incur from borrowing. This is a straightforward comparison of opportunity cost.
For example, If the firm invests $100, the firm can expect to earn $6 (6% of $100) whereas borrowing $100 would cost it $8 (8% of $100) in interest. Hence, investing the cash leads to a positive net return compared to borrowing.