A Firm Decides to Make a $40 Million Expenditure on Research

Multiple Choice

A firm decides to make a $40 million expenditure on research and development that will create a new product. This product is expected to generate a one-time increase in the firm's revenues by a total of $150 million a year later. The firm also estimates that the production cost of the new product will be $107 million, also realized one year after the initial R&D expenditure. What is the expected rate of return on this research and development expenditure?

A) 12.5 percent
B) 9.3 percent
C) 7.5 percent
D) 28.7 percent