Final answer:
The total capital of a business will depend on the cost of financial capital and potential returns, including societal benefits. The firm in question will invest $102 million initially but is prepared to invest $183 million if it could secure a 5% societal return over the 9% cost of capital. If taking societal benefits into account, the firm would be willing to borrow $52 million for R&D.
Step-by-step explanation:
The total capital of a business can be determined by understanding the context of investment, returns, and cost of financial capital. In this case, we're given two different scenarios:
- The firm initially invests $102 million.
- If the firm can secure a 5% return to society on its investments, on top of a 9% interest rate for its financial capital, it effectively works with a 4% rate of return. As a result, it will increase its investment to $183 million.
However, when considering spillover benefits, the firm would align its interest with the societal optimal point, indicated by the Dsocial curve, and would be willing to borrow $52 million for R&D investment.