Question

In determining whether or not to make an investment, good managers will make the investment only when:
a. the marginal benefits are greater than the marginal costs.
b. the marginal costs are only slightly greater than the marginal benefits.
c. they accept the reality of marginal costs and ignore marginal benefits.
d. the investment can provide a marginal tax break.

Answer 1

Answer:

A) the marginal benefits are greater than the marginal costs.

Explanation:

When you are trying to evaluate an investment project, marginal benefits and marginal costs are actually incremental benefits and incremental costs.

Incremental benefits are the benefits that a company earns by taking a particular action or making a particular decision, always compared to not taking that particular action or making that decision.The same applies to incremental costs.

So a good manager should decide to invest or not in a certain investment project if the revenues that the project will generate are greater than its costs, and are greater than the benefits that could be generated by other similar investments (opportunity cost).