XAT 2015 — LRDI Question 7
Answer the questions on the basis of information given in the following case.
A few years back Mr. Arbit and Mr. Boring started an oil refinery business. Their annual earing is currently just 50,000 million rupees. They are now exploring various options to improve the business. Mr. Xanadu, a salesperson from Innovative Technology Solutions (ITS), is trying to sell a new oil refinery technology to Mr. Arbit and Mr. Boring. This technology could potentially enhance their annual earning to 150,000 million rupees within a year. But they have to make one-time investment of 100,000 million rupees to implement the technology. If the technology is not successful, the investment would be lost. Mr. Arbit and Mr. Boring are discussing about possible risks of the investment.
Mr. Arbit is enthusiastic about this investment idea but Mr. Boring is a little sceptical. This impasse makes them approach a consultant. The consultant makes some observations. Which of the following observations, made by the consultant, might reduce Mr. Arbit’s enthusiasm for the new investment idea?
Answer & solution
Investment is warranted only when benefits outweigh costs.
- B
Technology investments give higher earnings in future.
- C
Investment in technology leads to reduction of costs in the long run.
- D
Technology risks can be controlled.
- E
Business is all about taking risky decisions.
From the options presented, the alternative which casts the biggest shadow of doubt over the technology investment would be an ideal choice.
Option 1 states that investing is only justified if the returns are more than the investment. The passage suggests that the investment if successful will offer an abundant return, but if unsuccessful would cause a substantial loss for the company.
Options 2 and 3 support technology investment and thus, indirectly support Mr. Arbit's enthusiasm.
Similarly option 4 is pro technology investment and can be eliminated.
Option 5 directly supports Mr. Arbit's enthusiasm and invalidates Mr. Boring's scepticism as the technology investment has a certain risk factor.
Hence, the correct answer is option 1.