Your company can lend at 5% and borrow at 6%. You have identified a project that...

Your company can lend at 5% and borrow at 6%. You have identified a project that requires an initial investment of $50,000, but you only have $21,000 available now, so you need to borrow the rest.

Part 1
What is the minimum rate of return on the project to make it attractive?

Solutions

Expert Solution

Answer - minimum rate of return to find investment attractive

Proportion of investment available to investment to be borrowed:

From - 50000 only 21000 is available i.e. 42% ( 21×100÷50)

From 50000 ,24000 will be borrowed i.e. 48% (24×100÷50); here 24 is 50-21

Now as per formula = .42(5) + .48(6) = 4.98

Minimum rate of interest to be attractive = 4.98%

Rahul Sunny answered 1 year ago

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