4. Suppose you run a firm and have access to an investment technology that delivers y = 1.03 · I in real terms, given investment I. Suppose you have 1, 000GBP in cash. Suppose banks’ deposits yield 2%...

4.

Suppose you run a firm and have access to an investment technology that delivers y = 1.03 · I in real terms, given investment I. Suppose you have 1, 000GBP in cash. Suppose banks’ deposits yield 2% interest rate. Will you invest your cash holding in the investment technology? What if you had no cash, but could borrow from the bank at the same interest rate as the return on deposits? Suppose you now have access to the four investment projects from Table 1. Which project(s) will you finance if r = 0.05?

Table 1: Possible investment projects

Project Investment needed Pay off

A. 1000。 1038

B。 2500。 2600

C。 100. 110

D. 160. 220