A profit-maximizing firm should not undertake an R&D project for which the
A) expected rate of return exceeds its interest-rate cost of funds.
B) interest-rate cost of funds exceeds the expected rate of return.
C) expected returns are in the distant future.
D) expected returns, though potentially very large, are uncertain.

Question

Quizplus · Accepted Answer

A profit-maximizing firm should only undertake an R&D project if the expected rate of return exceeds its interest-rate cost of funds. If the cost of interest is too high, then the project may not generate enough profit to justify the investment. Options C and D are not necessarily reasons to avoid an R&D project if the expected rate of return is sufficiently high. However, option B clearly indicates that the interest rate cost is too high, making the project nonviable.

A Profit-Maximizing Firm Should Not Undertake an R&D Project for Which