Final answer:
The firm should make the 6% investment because it is higher than the 8% interest it would pay on a loan and potentially higher than any other return it could get on its cash.
Step-by-step explanation:
The decision on whether a firm should make an investment that yields a 6% rate of return depends on the cost of capital. Since the firm has the cash on hand and would have to pay an 8% interest rate if it borrowed money, it should compare the 6% return with the opportunity cost of investing the cash elsewhere. If the opportunity cost is less than 6%, then the firm should proceed with the investment because it earns more than it would otherwise.
Let's calculate whether the firm should invest:
- If the firm invests the cash, it earns a 6% return.
- If the firm does not invest, its alternative is keeping the cash or potentially earning less than 6% somewhere else. It avoids paying 8% interest by not borrowing.
Without information on alternative investments or their returns, it's assumed that the 6% return is better than letting the money sit idle or investing it at a lower return rate.
Therefore, the firm should invest as it earns a higher return than the cost of financial capital if it were to borrow, and potentially higher than what it could earn elsewhere on their cash without taking additional risk.