Answer to Question #184600 in Economics for Julius Mnarani

Question

CYK firm intents to invest $4 million in a sisal project with the expected annul income flows on 200,ooo for the next 6 years. The firm is in a dilemma on whether to invest in this project or to buy a government bond with a face value 4 million and a coupon rate at 8 percent which happens to be the market rate of interest rate. Advise the management.

Answer 1

If the firm invests in this project, then:

200,000 per year can be counted as 200,000/4,000,000 = 0.05 or 5 percent per year, so buying a government bond with a coupon rate of 8 percent is a better option.