An investment costing $100 with an expected payoff in one year of $106 is offered to a customer. The customer believes that a 6% return is not very attractive. The seller responds by suggesting the customer borrow $90 for one year at 4% interest to help pay for the investment.
a. What is the customer's expected return if she borrows the money?
b. Does borrowing the money make the investment more attractive?
c. What does the Irrelevance Proposition say about whether borrowing the money makes the investment more attractive?