Final answer:
The borrowing rate of return refers to the interest rate that a firm would have to pay if it were to borrow money for an investment. To determine whether the firm should make the investment, we compare the borrowing rate of return with the expected rate of return. If the borrowing rate is higher than the expected rate, it may not be a good idea to make the investment.
Step-by-step explanation:
The borrowing rate of return refers to the interest rate that a firm would have to pay if it were to borrow money for an investment. In this case, the firm is considering an investment that would earn a 6% rate of return. However, if the firm were to borrow the money, it would have to pay 8% interest on the loan.
To determine whether the firm should make the investment, we need to compare the borrowing rate of return (8%) with the expected rate of return (6%). If the borrowing rate is higher than the expected rate, it may not be a good idea to make the investment.
If the firm currently has the cash and does not need to borrow, it can make the investment and earn a 6% rate of return. However, if the borrowing rate were higher than the expected rate, it would be more profitable for the firm to borrow the money and invest it elsewhere.