Final answer:
The firm should make the investment despite the negative net return.
Step-by-step explanation:
When evaluating an investment that will earn a 6% rate of return, it is important to consider the interest rate on borrowed money. If the firm were to borrow money, it would have to pay 8% interest on the loan. However, since the firm has the cash and does not need to borrow, it can make the investment.
To show our work, we can calculate the net return from the investment. The net return is the rate of return minus the cost of funds. In this case, the rate of return is 6% and the cost of funds is 8%, so the net return is -2%.
The firm should still make the investment even though the net return is negative because it is still earning a positive rate of return. It's important to note that the firm could potentially earn a higher rate of return if it were to invest the cash elsewhere, but without more information, it's not possible to determine if that is the case. Therefore, based on the given information, the firm should make the investment.