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:

Peak Efficiency

The highest level of operational performance where resources are utilized in the most effective way possible with minimal waste.

Barriers To Entry

Obstacles that make it difficult for new firms to enter a market, such as high initial investment, licensing requirements, and access to technology.

Patents

Legal documents granting an inventor exclusive rights to their invention, preventing others from making, using, or selling the invention for a certain period of time.

Pharmaceutical Companies

Organizations dedicated to developing, producing, and marketing drugs or pharmaceuticals licensed for use as medications.