Darren and Alice Johnson Are in the Information Technology Consulting

question 7

Multiple Choice

Darren and Alice Johnson are in the information technology consulting business.Alice's father just passed away and left her $100,000.They are considering investing her inheritance in a server farm owned by one of their clients.The client has a cash flow problem and has offered the Johnsons the following investment proposal: purchase an investment interest for $100,000 today;receive cash distributions of $6,000,$7,000,and $8,000 respectively over the next three years;and at the end of the third year the owner will purchase back the interest in the server farm for $115,000.Even though the owner is a client the Johnsons trust,they consider the investment to be risky.Darren and Alice feel that they should earn at least 12 percent on the investment in order to be fairly compensated for the investment risk.Should the Johnsons invest in the server farm?

• A)Yes,the return equals their required rate of return.
• B)Yes,the return exceeds their required rate of return.
• C)No,the return meets their required rate of return.
• D)No,the return does not meet their required rate of return.

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Definitions:

Invested

The act of allocating resources, typically money, into something with the expectation of generating income or profit, such as stocks, bonds, real estate, or a business venture.

Balance of Trade Surplus

A situation where the value of a country's exports exceeds the value of its imports over a given period, indicating a positive balance of trade.

Exports

Goods or services produced in one country and sold to buyers in another, contributing to the selling country's national income.

Imports

Goods or services brought into one country from another for sale or use.