4. Answer the following lettered questions on the basis of the information in this table: [LO14.3]

Amount of R&D, millions Expected rate of return on R&D, %

$10 16 20 14 30 12 40 10 50 8 60 6

a. If the interest-rate cost of funds is 8 percent, what will be the optimal amount of R&D spending for this firm?

b. Explain why $20 million of R&D spending will not be optimal.

c. Why won’t $60 million be optimal either?