A firm is considering a new capital expenditure of $2 million. This expenditure is expected to yield $1 million in annual profits for each of two years. Given this information, the firm should _____ the project, _____
A)refuse; since the costs are not offset by the profits.
B)undertake; since the profits will be greater than the costs.
C)undertake; only if the interest rate is zero.
D)undertake; regardless of the interest rate.

Question

Quizplus · Accepted Answer

The firm should undertake the project only if the interest rate is zero because the total profits ($2 million) exactly match the expenditure ($2 million), so any positive interest rate would make the present value of profits less than the cost.

A Firm Is Considering a New Capital Expenditure of $2