Question

A large pharmaceutical firm can make marginal rates of return on the following investments:

A 12%, B 10%, C 8%, D 6%, E 4% and F 2%.

How many will it produce at cost of capital of 8%(1 point) and at 4% (1 point). And why? Assume that the company will invest until the marginal rate equals cost of capital.  

Answer 1

(a) When cost of capital = 8%

Since investments A, B and C have rate of return higher than or equal to the cost of capital, the firm will investment in these three investments.

(b) When cost of capital = 4%

Since investments A, B, C, D and E have rate of return higher than or equal to the cost of capital, the firm will investment in these 5 investments.

NOTE: Since Investment amounts are not mentioned, numerical value of total investment cannot be calculated.