A profit-maximizing firm should not undertake an R&D project for which the:
A) expected rate of return exceeds its interest-rate cost of funds.
B) interest-rate cost of funds exceeds the expected rate of return.
C) expected returns are in the distant future.
D) the expected returns,though potentially very large,are uncertain.

Question

Quizplus · Accepted Answer

A profit-maximizing firm should only undertake an R&D project if its expected rate of return is higher than its interest-rate cost of funds. Therefore, option A is incorrect. Option C is not necessarily true as long-term returns can be discounted to current values. Option D presents uncertainty, which may lead to higher risk, while a profit-maximizing firm prefers lower risk. Therefore, option B is the best choice as the interest-rate cost of funds should not exceed the expected rate of return.

A Profit-Maximizing Firm Should Not Undertake an R&D Project for Which