Suppose a firm expects that spending $20M on R&D will result in a new product that can
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Question:
Suppose a firm expects that spending $20M on R&D will result in a new product that can be sold next year. Selling that product will increase revenue by $30Mand it will cost $29M.
A) Whatis the expected rate of return?
B) If the firm can get a bank loan at 6%, will it do so?
C) If the loan rate falls to 4%, will the firm's decision change?
D) Say the firm has savings of $20M, enough to fund the R&D without borrowing. If the firm can invest either in the R&D or in government bonds that pay 3.5% a year, which should it do?
E) What if the bonds were paying 6.5% a year?
Expert Answer:
A Expected rate of return The expected rate of return is the ratio of the expected net profit to the ... View the full answer
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