Answer the following lettered questions on the basis of the information in this table:
Expected Rate of
Amount of R&D, Millions Return on R&D, %
$10 ................. 16
20 ................. 14
30 ................. 12
40 ................. 10
50 ................. 8
60 ................. 6
a. If the interest-rate cost of funds is 8 percent, what will be the optimal amount of R&D spending for this firm?
b. Explain why $20 million of R&D spending will not be optimal.
c. Why won’t $60 million be optimal either?