Evaluation of capital investments based on economic profit motivates managers to invest in projects that ________ because those investments increase the division's economic profit.

Question

Quizplus · Accepted Answer

Economic profit is the difference between the revenue generated by a project and the cost of capital, which is the cost of financing the project. Therefore, projects that earn a return in excess of the cost of capital will increase the division's economic profit and will be preferable for investment. Choices A and B do not take into account the cost of financing the project, while choice D only considers net income, which is not a suitable measure of a project's profitability.

Evaluation of Capital Investments Based on Economic Profit Motivates Managers