Final answer:
The firm should not make the investment because the rate of return at 6% is less than the 8% interest it would pay on borrowed capital, making the investment financially unwise.
Step-by-step explanation:
A firm's cash flow from investing activities is a key component of its financial health. When a firm is considering an investment, such as purchasing new equipment or technology, it weighs the potential rate of return against the cost of capital. If a firm can invest at a 6% rate of return but would have to pay an 8% interest rate on borrowed money, even if it currently has the cash, it's generally not advisable to proceed with the investment. In this case, the opportunity cost of using the cash is higher than the return on the investment. The rate of return is below the firm's cost of capital, which includes considerations like opportunity costs, inflation, and the risk-free rate of return.
Moreover, the decision to invest includes assessing the risks and the potentials for growth. The firm must also consider whether the investment will generate sufficient cash flow in the future to justify the current expenditure. Since the investment's rate of return is lower than the cost of capital, the firm would not cover its opportunity cost, subsequently affecting profitability negatively. Hence, based on this analysis, investing would not contribute positively to the firm's growth.