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If a firm is not borrowing from banks or selling bonds to finance its investment spending,...

If a firm is not borrowing from banks or selling bonds to finance its investment spending, why would it consider the real interest rate when deciding whether or not to undertake an investment project?

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Answer #1

Even if the firm is not borrowing, it needs ot consider the real interest arte as eal interest rate is the opportunity cost of the investemnt. If the money is not used in the investment and instead put into savings, it will eanr the real interest rate. Thus all the cash flows from the investment need to be discounted with the real interest rate to see if the return is more than simply saving the money.

The bottom line is that money has an opportunity cost represented by the real interest rate as it will be earned if the money is nto invested.

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