Use the concept of present value to explain the inverse relationship between the interest rate and the amount of investment a firm undertakes

What will be an ideal response?

As the interest rate falls, the present value of the income stream from an investment rises. Firms should undertake an investment project only if the present value of the income stream is higher than the full cost of the investment. Thus, the lower the interest rate, the greater the likelihood that this will be true. As the interest rate falls, projects that were not previously profitable will become profitable, and the firm's level of investment will rise.