Suppose that BP is considering exploring a new oil field.

a. Assuming that BP needs to borrow money in the bond market to finance the purchase of new oil rigs and drilling machinery, why would an increase in interest rates affect BP’s decision about whether to carry out the exploration?

b. If BP has enough of its own funds to finance the development of the new oil field without borrowing, would an increase in interest rates still affect BP’s decision about whether to undertake the new project? Explain.