Final answer:
The question addresses business finance decisions regarding investments and the implications of interest rates and returns. The firm would invest $183 million considering an effective 4% rate of return after accounting for the cost of capital and the social return. With available cash, investing at a 6% return is advisable to exceed the zero cost of capital.
Step-by-step explanation:
Understanding Investment Decisions in a Business Context
The question revolves around the CFO's consideration of an appropriate annual interest rate for an investment and the subsequent investment decisions a company should make. If the firm's cost of capital is at a 9% interest rate, but it can secure a 5% return to society, it effectively faces a 4% rate of return on its investments. Hence, according to the provided information, the firm should be willing to invest $183 million as it combines both the private return and the social return.
In the second scenario provided in the question, the firm is contemplating an investment option that will provide a 6% return. Since the firm has cash on hand and does not need to borrow at an 8% interest rate, it should go ahead with the investment because the rate of return is greater than its cost of capital, which is 0% since it’s using existing cash reserves.
Investment decisions such as these are crucial for the firm's financial strategy, necessitating careful analysis to ensure that the investments yield returns that exceed their cost, thereby adding value to the firm.