Question

Explain what would happen to interest rates if a new process was developed that allowed automobiles to run off oil that was formulated based on lemonade? The technology used to convert this liquid to gas would be pricey but well worth it. What impact would this technology have on interest rates?

Answer 1

It's the technology is pricey which means a huge amount of investment is needed.

It will take many years to benefit from this project and recover the capital expenditure in terms of buying new machinery, research and development etc. It is a long term project and it is an asset-heavy business.

Debt financing is one of the best available source of finance for a long term project with asset-heavy business because Debt financing is the cheapest source of long-term capital.

There is a good future Outlook for this business, therefore more people will want to invest in it.

As more people want to borrow for this business. there is a limited supply of money and more demand due to which interest rate rises.

Hence, such new technology will raise interest rates.