When a company uses economic profit as a performance metric,managers have an incentive to invest only in projects ________.
A) earning less than the return on investment of the segment or division
B) earning more than the return on investment of the segment or division
C) earning more than the cost of capital of the segment or division
D) earning less than the cost of capital of the segment or division

Question

Quizplus · Accepted Answer

Economic profit is calculated by subtracting both explicit and implicit costs from revenue. Managers with an incentive to increase economic profit would only invest in projects with a return higher than the cost of capital of the segment or division, as these projects would generate positive economic profit. Therefore, the correct choice is C, earning more than the cost of capital of the segment or division.

When a Company Uses Economic Profit as a Performance Metric,managers