Suppose Your Boss Comes to You and Asks You to Re-Evaluate

question 83

Essay

Suppose your boss comes to you and asks you to re-evaluate a capital budgeting project.The first evaluation was in error,he explains,because it ignored flotation costs.To correct for this,he asks you to evaluate the project using a higher cost of capital which incorporates these costs.Is your boss' approach correct?
Why or why not?

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Definitions:

R&D

Research and Development, which refers to the activities companies undertake to innovate and introduce new products or services.

Innovation

The process of translating an idea or invention into a good or service that creates value and for which customers will pay.

Oligopolists

Firms or entities that dominate an industry or market in an oligopoly, where a small number of companies have significant market power and influence over prices and output.

R&D

Research and development; activities undertaken by companies or governments to innovate and introduce new products or services.