Mr. Arbit and Mr. Boring Refinery Investment Case

XAT 2015 · DM · Hard · Decision Making

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Passage / data set

A few years back Mr. Arbit and Mr. Boring started an oil refinery business. Their annual earning 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.

Question 1 of 3

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?

  1. A.

    Investment is warranted only when benefits outweigh costs.

  2. B.

    Technology investments give higher earnings in future.

  3. C.

    Investment in technology leads to reduction of costs in the long run.

  4. D.

    Technology risks can be controlled.

  5. E.

    Business is all about taking risky decisions.

Question 2 of 3

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?

  1. A.

    All other competitors are aggressively investing in risky technologies.

  2. 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.

  3. C.

    Preliminary studies indicate that success rate of the technology is 85%.

  4. D.

    The R&D team of ITS is working to counter any possible downside of the technology.

  5. E.

    Business is all about taking risky decisions.

Question 3 of 3

Mr. Arbit and Mr. Boring did not invest in the new technology, but the new technology is a big success. Repentant, they are now estimating the additional amount they would have earned (i.e. forgone earnings) had they invested in the new technology. However, the two owners differed on expected lifespan of the new technology. Mr. Arbit expected lifespan to be 5 years, whereas, Mr. Boring expected it to be 2 years. After the technology gets out-dated, the earnings from the business would drop back to 50,000 million rupees. What would be the difference between two expected foregone earnings after 5 years of the technology investment, if yearly earnings are deposited in a bank @10%, compounded annually?

Note: Forgone Earnings = (Earnings from business with new technology) - (Earnings from business without new technology)

  1. A.

    231,200 million rupees

  2. B.

    331,000 million rupees

  3. C.

    400,510 million rupees

  4. D.

    431,000 million rupees

  5. E.

    464,100 million rupees

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