Suppose a firm expects that a $40 million expenditure on R&D in the current year will result in a new product that can be sold next year. Selling that product next year would increase the firm’s revenue next year by $60 million and its costs next year by $58 million.
Instructions: Enter your answer as a whole number.
a. What is the expected rate of return on this R&D expenditure? percent.
b. Suppose the firm can get a bank loan at 4 percent interest to finance its $40 million R&D project. Will the firm undertake the project? (Click to select)No Yes.
c. Now suppose the interest-rate cost of borrowing rises to 6 percent. Will the firm undertake the project? (Click to select)Yes No.
d. Now suppose that the firm has savings of $40 million—enough money to fund the R&D expenditure without borrowing. If the firm has the chance to invest this money either in the R&D project or in government bonds that pay 6.5 percent per year, which should it do? (Click to select) Government bonds R&D.
e. What if the government bonds were paying 3.5 percent per year? (Click to select) Government bonds R&D.