A firm is currently considering plant expansion. There is some question as to wh

Question

A firm is currently considering plant expansion. There is some question as to what minimum attractive rate of return to use in the economic analysis of the proposed expansion. Banks are currently lending money at 11.5%. The combined cost of capital has been estimated to be 10.25%. In addition, the firm could invest its money in a related sister corporation which pays 14%. What minimum attractive rate of return should the firm use in the analysis of plant expansion? Select the most appropriate answer from the choices below. No partial credit. Show all work, no credit if work not shown (not a guessing game).

Explanation / Answer

Minimum attractive rate of return on expansion should be equal to the maximum return company can get from current investments

Minimum attractive return = 14%

c. 14%

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