Final answer:
True, a firm should evaluate investments in cash terms since acquisitions require cash outlays. The return on assets should be assessed based on the ability to generate future cash flows relative to this initial outlay. If a firm has the cash and the expected return exceeds its target, investing without borrowing is favorable.
Step-by-step explanation:
When assessing whether a firm should invest, it's indeed true that the return should be evaluated in cash terms since cash outlay is required to acquire assets. This is because the true measure of an investment's success is its ability to generate cash flows that exceed the initial outlay.
When a firm considers an investment, such as purchasing machinery, constructing a new plant, or initiating a research and development project, it is planning to spend money now with the expectation of future profits. To finance these investments, firms may acquire financial capital through early-stage investors, reinvesting profits, borrowing, or by selling stock.
Regarding the specific question of whether a firm with enough cash should invest in a project with a 6% rate of return when the borrowing cost is 8%, the firm would not need to consider the borrowing cost since it has the necessary cash on hand. It should look at the potential return of 6% and decide if it's sufficient based on the firm's required rate of return or opportunity cost of capital. If 6% meets or exceeds its target, the investment can be considered favorable.