1.5.

a. The financial analysts at Lexmark have evaluated five major projects. Each project, if it actually goes forward, will be financed by going to a bank to borrow the money.

They've calculated a "break-even interest rate": If they can borrow cash to pay for the project at less than that rate, the project will likely be a success; if the rate is higher, then it's not worth it.

Cost Project A Project B Project C Project D Project E

$100 million

$50 million

$200 million

$25 million

$150 million Break-even interest rate 8%

12%

50%

4%

10%

Saving, Investment, and the Financial System • CHAPTER 9 • 201

a. If the interest rate is 11%, which projects will Lexmark take on? If the market interest rate is 6%, which projects will it take on?

b. Let's turn the above information into a demand curve for loanable funds.

Organize this data to convert it into Lexmark's

"loanable funds demand" curve. Note: It will look just like an ordinary demand curve, only with more breaks.

Interest rate Quantity of loanable funds