Suppose You Analyze a Particular Deal and It Appears That

question 3

Multiple Choice

Suppose you analyze a particular deal and it appears that for an investment of $1,000,000 your client can obtain a positive NPV of over $500,000. Your client is typical of the type of high tax bracket individual investors who commonly purchase and sell this type of property, and indeed typically determine equilibrium prices in the asset market in which these properties are sold. What should you do?

• A) Reject the deal out of hand because it costs twice as much as its NPV.
• B) Phone your client right away on your cell phone and urge her to pounce on this deal before it "gets away" - the seller must have made a mistake in their offering price!
• C) Buy the property with cash, take out an 80% loan-to-value ratio mortgage, and laugh all the way to the bank with $200,000 of arbitrage profits!
• D) Sharpen your pencil, double-check your assumptions and analysis, try to find what's unique about client.

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Definitions:

Quality Cost Report

A report that summarizes the costs associated with ensuring products or services meet quality standards, including prevention, appraisal, and failure costs.

Defective Products

Items produced that do not meet the quality standards set by the company or industry, leading to potential returns or losses.

Internal Failure Cost

Costs associated with defects found before a product reaches the customer, including scrap and rework expenses.

Quality Cost Report

A document or tool that tracks the costs associated with ensuring the quality of products or services, including prevention, appraisal, and failure costs.