Question

Irving owns a chain of movie theaters. He is considering whether he should build a new theater downtown. The expected rate of return is 15 percent per year. He can borrow money at a 12 percent interest rate to finance the project. Should Irving proceed with this project?

Answer 1

Irving should proceed with the project because the expected rate of return is higher than the interest rate on the loan.

Step-by-step explanation:

Irving should proceed with the project because the expected rate of return (15%) is higher than the interest rate on the loan (12%). This means that Irving has the potential to earn a higher return on his investment than the cost of borrowing the money. Here's the calculation:

1. Expected Rate of Return - Loan Interest Rate = Net Return
2. 15% - 12% = 3%

Since the net return is positive (3%), Irving should proceed with the project.

Answer 2

Yes, Irvin should proceed with this project.

Step-by-step explanation:

It will profit Irvin to proceed with this project because loans are only for a short while but his investment will outlive the loan. Asides that, the major reason why Irvin must proceed with this project is simply because the expected rate of returns from building the new theater exceeds the interest rate of borrowing.