The ABC Company can borrow and lend funds at an interest rate of.08. It can invest $11
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The ABC Company can borrow and lend funds at an interest rate of.08.
It can invest $11 million in a risky project that on the average will lead to net cash flows of$1 million per year. A consultant has suggested that the firm use its cost ofcapital of.10 in computing the present value ofthe investment. The investment's investment's life is extremely long.
Insurance can be purchased that will guarantee the $1 million per year.
Should the investment be undertaken? How much could the fInn afford to pay for the insurance?
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