Final answer:
The question primarily deals with investment decisions and opportunity cost. A firm should invest if the rate of return on the investment exceeds the cost of capital. In this case, with a 6% rate of return and no need to borrow at an 8% interest rate, the firm should invest as long as there's no better alternative for using the cash.
Step-by-step explanation:
The question is asking about the effective annual interest rate for a revolving credit arrangement if the firm does not utilize it during the year. The scenario presented is different, focusing on whether a firm should make an investment with available cash instead of borrowing at a higher interest rate. To determine if a firm should invest, compare the rate of return on the investment to the cost of capital. If the rate of return is higher than the cost of capital or the interest rate of a loan, then it would generally be advisable to make the investment.
In the example provided, the firm has the ability to invest in something that would yield a 6% return. If they were to borrow funds to make the investment, they would pay 8% in interest. However, since they currently possess the cash and do not need to borrow, the cost of capital is effectively the opportunity cost of not investing the cash elsewhere. Assuming no other opportunities are offering a higher return than 6%, the firm should make the investment.
However, the initial question on effective annual interest rate if the credit is not used cannot be answered directly with the information provided and seems to be part of a different problem set.