Irving owns a chain of movie theaters. He is considering whether he should build a new theater downtown. The expected rate of return is 15 percent per year. He can borrow money at a 12 percent interest rate to finance the project. Should Irving proceed with this project?

1. Yes

2. No

The expected rate of return is what an investor or entrepreneur expects the profit to be on the investment made.The following formula gives the expected rate of return:

$ExpectedRateofReturn=\frac{ExpectedProfit}{InvestmentCost}\times 100$

Interest rate is the rate that determines the payment to the lender for the use of loan money. It is the cost of using funds for investment.

The decision to undertake a project depends on the expected rate of return and interest rate.

Case I: Expected rate of return > interest rate; entrepreneur will undertake the project.

Case II: Expected rate of return = interest rate; an entrepreneur is indifferent (may or may not undertake the project).

Case III: Expected rate of return < interest rate; entrepreneur will not undertake the project.

The expected rate of return of the project is 15%, which is greater than the interest rate of 12%. Irving should go ahead with the project as the benefit exceeds the cost of investment.