XAT 2015 — LRDI Question 8
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.
In order to sell the technology to Mr. Arbit and Mr. Boring, Mr. Xanadu is thinking of five possible sales pitches. Which of the following sales pitches would reduce uncertainties the most for Mr. Arbit and Mr. Boring?
Answer & solution
- A
All other competitors are aggressively investing in risky technologies.
- B
If the technology succeeds, the annual earnings would grow 3 times from the next financial year and they would be able to recover the invested money within 1 year.
Preliminary studies indicate that success rate of the technology is 85%.
- D
The R&D team of ITS is working to counter any possible downside of the technology.
- E
Business is all about taking risky decisions.
Option 1 cannot be affirmed as it generalises the idea of investing in risky technology. The other competitors mentioned might be better prepared to face the risks involved as compared to Mr. Arbit and Mr. Boring.
Option 2 presents an already mentioned aspect of the technology investment, which is mentioned in the passage.
The data mentioned in option 3 states that the risk of the technology investment becoming unsuccessful is only 15%. Thus, option 3 would most reduce the uncertainties for the partners.
The fact that the R&D team of ITS is working on reducing risks for the technology does not imply the R&D team will be successful in doing so.
Option 5 invalidates the prime purpose presented in the question of reducing uncertainties.
Hence, the correct answer is option 3.