Question

10)

Axon Industries needs to raise $23.78M for a new investment
project. If the firm issues one-year debt, it may haveto pay an
interest rate of 10.09 %, although Axon's managers believe that
5.32 %

Answer 1

Axon Industries should not make the investment because the effective rate of return is negative.

Step-by-step explanation:

Axon Industries needs to raise $23.78M for a new investment project. If the firm issues one-year debt, it may have to pay an interest rate of 10.09%.

However, the managers believe they can capture a 5.32% return to society. To calculate how much the firm should invest, we can use the effective rate of return: 5.32% - 10.09% = -4.77%. This means that the firm would effectively lose 4.77% on the investment.

Therefore, the firm should not make the investment since it would result in a negative return.