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Investments for environmental protection

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Question: Some investments that a firm undertakes will not produce a yield that exceeds the firm's cost of capital. For example, some projects simply will not work out and will therefore produce losses. These in time will have to be abandoned. Other projects, such as investments for environmental protection, are required by law and have to be undertaken even if they do not generate returns. Because of this, it has been argued that the remaining projects will have to produce returns that are in excess of the firm's cost of capital if the firm is to be profitable. Hence, the yardstick by which the firm judges the acceptability of new investments should not be the cost of capital, but a figure that substantially exceeds the cost of capital. Do you agree? Carefully justify your position.

Reference no: EM131749810

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