Suppose Your Firm Is Considering an Investment Project That Will

question 112

Multiple Choice

Suppose your firm is considering an investment project that will generate an expected return of 5%. The project costs $200,000. Suppose further that your firm has $200,000 of retained earnings. If the market interest rate is 10%, your firm should

• A) loan the retained earnings out at 5%.
• B) loan the retained earnings out at 10%.
• C) loan the retained earnings out at 15%.
• D) invest the $200,000 of retained earnings in the project.

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Definitions:

Social Welfare Function

A theoretical framework in economics that represents preferences over social states or outcomes, aiming to aggregate individual utilities into a measure of collective welfare.

Pareto Optimum

A distribution of resources in which it is not feasible to rearrange in a way that improves one person's situation without detrimentally affecting at least another individual's standing.

Utility Possibilities Frontier

A graph that shows the maximum amount of utility that can be achieved by different individuals or groups from a fixed set of resources.

Production Possibilities

A curve or frontier that illustrates the maximum feasible amounts of two commodities that can be produced with available resources and technology.