Asked by Pauline Zheng on Sep 23, 2024
Verified
Projects with a positive NPV create
A) economic profits since they earn a return higher than the company's cost of capital
B) economic profits since they earn a return lower than the company's cost of capital
C) accounting profits only since they earn a return higher than the company's cost of capital
D) accounting profits only since they earn a return lower than the company's cost of capital
Economic Profits
Profits exceeding the opportunity costs of a next best alternative, measuring the extent to which a firm has generated excess returns over its costs, including the cost of capital.
Cost of Capital
The rate of return a company must earn on its investments to maintain its market value and attract funds.
- Comprehend the principle of Net Present Value (NPV) and the methodology for its computation.
Verified Answer
CM
Carolina Marte2 days ago
Final Answer :
A
Explanation :
Projects with a positive NPV generate economic profits since they are earning a return higher than the company's cost of capital. This means that the money invested in the project is generating more value than the cost of borrowing that capital. Accounting profits only take into account the explicit costs of a project and do not consider the company's cost of capital, which is why option C and D are incorrect. Option B is also incorrect because earning a return lower than the company's cost of capital would result in economic losses, not profits.
Learning Objectives
- Comprehend the principle of Net Present Value (NPV) and the methodology for its computation.
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