Interest Rate Threshold for Aggregate Investment
An economy has three potential investment projects with the following costs and expected returns in one year:
- Project A: Cost $1,000, Return $1,080
- Project B: Cost $2,000, Return $2,100
- Project C: Cost $500, Return $550
Firms will only undertake projects for which the present value of the future return is greater than or equal to the initial cost. What is the highest possible interest rate at which the total, economy-wide investment would be exactly $3,500? Explain your reasoning.
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