Fred\'s Fish House is contemplating an investment of 2.000,000 in new shrimp boa

Question

Fred's Fish House is contemplating an investment of 2.000,000 in new shrimp boats and deep fryers. Management of this company predict a 10.4 percent annual return on this investment. The current market rate of interest is 5.4 percent. Fred's Fish House will A. make the investment since the cost is less thanthe expected return. B.not make the investment since the cost is less than the expected return. C. not make the investment since the cost is greater than the expected return. D.make the investment since the cost is greater than the expected return. At which of the market rates of interest below would Fred's Fish House be inclined to make the investment? 3%. B. 2%. C. 3.5%. D. at any of these interest rates listed.

Explanation / Answer

The current market rate of interest is the rate of cost of capital since it is the rate at which Fred's Fish House can borrow capital from the market. It will be inclined to make an inventment only when the return offered by the investment made is greater than this cost of borrowing i.e. greater than current market rate of interest.

Therefore, Fred's Fish House will make the investment since the cost of 5.4% is less than the expected return of 10.4%.

Fred's Fish House will be inclined to make the investment when the market rate of interest is less than the ROI. Thus, the answer is D. at any of these interest rates listed, it will be making investment since all of the mentioned rates are lower than ROI of 10.40%.

Related Questions

Navigate

• Browse (All)
• Browse F
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.