Author Question: When buying a piece of equipment, it is always best for the firm to pay cash instead of borrowing ... (Read 105 times)

torybrooks · **on:** Jul 1, 2018

When buying a piece of equipment, it is always best for the firm to pay cash instead of borrowing the funds since this renders the equipment less costly.

Indicate whether the statement is true or false

Question 2

Which is a required characteristic of a perfectly competitive industry?

A) There are few firms so that none can influence market price.
B) Products are highly differentiated.
C) Barriers to entry are high.
D) None of the above

srodz · **Reply #1 on:** Jul 1, 2018

Answer to Question 1

False. It depends. The opportunity cost of the capital when paying cash is the interest the firm receives on its cash reserves. This is an implicit cost. The opportunity cost of the capital when the funds are borrowed is the interest the firm must pay to the lender. This is an explicit cost. If the rate the firm receives on its cash reserves exceeds the rate at which it borrows, the firm is better off borrowing the funds to buy the equipment.

Answer to Question 2

D