Question

XYZ Gadget Company is currently considering which investment projects it should undertake. The following list of projects along with the estimated rate of return of each project is presented to the executive management team: Project A (8.5%) Project B (7%) Project C (6%) Project D (11%) Project E (5.5%) The current interest rate in the loanable funds market is 5%. However, if an increase in government borrowing pushes the interest rate to 7.5%, we would expect the company to discontinue investment plans for all but _________ of its planned projects.

Answer 1

If the interest rate is 9%, Gizmo will invest in projects that yield a return of 14% or higher if it considers the social benefits.

Step-by-step explanation:

The Gizmo Company's investment in R&D would depend on the going interest rate and the private and social benefits of the investment. If the interest rate is 9% and the company only considers the private benefits, it would invest in projects that yield a return equal to or higher than the interest rate. However, if the company also considers the social benefits, which are 5% higher than the private benefits, it would invest in projects that yield a return of 9% + 5% = 14% or higher.