Your borrowing rate is 10% per year. Your lending rate is 4% per year. Your project costs $1,000 and will have a rate of return of 8%. Assume you have $900 to invest.
(a) Should you take the project?
(b) You can think of the $900 as the amount of money that you are not consuming. Say your wealth is $2,000, but in the previous question, you wanted to consume $1,100. Could you still consume this much and take the project? How much could you consume and still want to take the project?