A firm's decision to invest in a project is based on the
A) real interest rate and expected total revenue.
B) real interest rate and the expected profit.
C) nominal interest rate and expected total revenue.
D) nominal interest rate and the expected profit.

Question

Quizplus · Accepted Answer

A firm's decision to invest in a project is based on the real interest rate and the expected profit. Real interest rates reflect the cost of borrowing money and expected profit is the return on investment. Nominal interest rate is the interest rate before adjusting for inflation, while real interest rate is the interest rate after adjusting for inflation. Therefore, the expected profit is considered in real terms, not nominal terms, when making investment decisions.

A Firm's Decision to Invest in a Project Is Based