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

Question

​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

Quizplus · Accepted Answer

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.

​Projects with a Positive NPV Create

Projects with a Positive NPV Create