In: Economics
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?
Answer - minimum rate of return to find investment attractive
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%