A firm decides to make a $20 million expenditure on research and development that will create a new product. This product is expected to increase the firm's revenues by a total of $24 million in the next year. The firm also estimates that the production cost of the new product will be $22 million. What is the expected rate of return on this research and development expenditure?
A) 8.3 percent
B) 9.1 percent
C) 10 percent
D) 20 percent

Question

Quizplus · Accepted Answer

The expected rate of return can be calculated as follows:

Expected rate of return = (Incremental revenues - Production cost - Research and development expenditure)/(Research and development expenditure) x 100

Plugging in the given values, we get:

Expected rate of return = ($24 million - $22 million - $20 million)/($20 million) x 100
Expected rate of return = $2 million/$20 million x 100
Expected rate of return = 10 percent

Therefore, the expected rate of return on this research and development expenditure is 10 percent, which is the best answer choice.

A Firm Decides to Make a $20 Million Expenditure on Research