Microeconomics 18th Edition by Campbell McConnell, Stanley Brue, Sean Flynn

Exercise 40

Suppose a firm expects that a $20 million expenditure on R D will result in a new product that will increase its revenue by a total of $30 million 1 year from now. The firm estimates that the production cost of the new product will be $29 million.
a. What is the expected rate of return on this R D expenditure
b. Suppose the firm can get a bank loan at 6 percent interest to finance its $20 million R D project. Will the firm undertake the project Explain why or why not.
c. Now suppose the interest-rate cost of borrowing, in effect, falls to 4 percent because the firm decides to use its own retained earnings to finance the R D. Will this lower interest rate change the firm's R D decision Explain.