Aardvark Software, Inc

question 38

Multiple Choice

Aardvark Software, Inc. can purchase all the stock of Zebra Computer Services for $1,200,000 in cash. Zebra is expected to generate net after-tax cash flows of $100,000 per year for each of the next 12 years. Based solely on the cash flow analysis, Aardvark should

• A) not purchase Zebra Computer Services.
• B) purchase Zebra Computer Services.
• C) purchase Zebra only if Aardvark's cost of capital is between 5% and 10%.
• D) purchase Zebra only if Aardvark's cost of capital is above 10%.

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Definitions:

Good 2

Refers to a second good or item considered in a theoretical economic model, usually in the context of comparative analyses.

Fixed Ratio

A quantitative relationship between two or more variables where one variable is a fixed multiple of the others, often used to describe proportional relationships in finance and engineering.

Excess Goods

Products that exceed the demand in the market, often leading to surplus and potential waste.

Perfect Substitutes

Two goods that could be used in place of one another with no loss of utility to the consumer.