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:

Labor

Human effort, either physical or mental, used in the production of goods and services.

Core Countries

Nations, usually industrialized, that dominate the global economic system through wealth, diverse production, and strong government institutions.

World Systems Theory

A macro-sociological perspective that analyzes societies in terms of the global economic system, dividing the world into core, periphery, and semi-periphery zones.

Peripheral Countries

Nations that are less developed than the semi-periphery and core countries, often exploited for their resources by more economically dominant nations.