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Senior Manager
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Investments [#permalink] New post 02 Sep 2008, 04:00
Companies considering new cost-cutting manufacturing processes often compare the projected results of making the investment against the alternative of not making the investment with costs, selling prices, and share of market remaining constant.
Which of the following, assuming that each is a realistic possibility, constitutes the most serious disadvantage for companies of using the method above for evaluating the financial benefit of new manufacturing processes?
(A) The costs of materials required by the new process might not be known with certainty.
(B) In several years interest rates might go down, reducing the interest costs of borrowing money to pay for the investment.
(C) Some cost-cutting processes might require such expensive investments that there would be no net gain for many years, until the investment was paid for by savings in the manufacturing process.
(D) Competitors that do invest in a new process might reduce their selling prices and thus take market share away from companies that do not.
(E) The period of year chosen for averaging out the cost of the investment might be somewhat longer or shorter, thus affecting the result.

Please post explanations as well not just answers!
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Re: Investments [#permalink] New post 02 Sep 2008, 05:34
IMO D. The method described assumes that market share is constant. Answer D attackes that assumption and the model gets destroyed.

All the other answer choices are the same - each shows some uncertainty in making predictions, but the same thing can be said of any other model used for any prediction. In other words, they are too general.
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Re: Investments [#permalink] New post 02 Sep 2008, 05:38
I will go with D. The problem statement mentions that selling price and market share are constant for investment decision. However, if a competitor invests in a better process resulting in lower price and higher market share, then this will pose most serious disadvantage to the company.
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Re: Investments [#permalink] New post 02 Sep 2008, 07:08
IMO C. Companies use comparison of projected result to invest with alternatives of not making investment. Now if companies compare initial expenses of cost cutting process as hindrance to business and drop the plan, in long run companies will miss the opportunity to utilize the cost-saving process.
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Re: Investments [#permalink] New post 02 Sep 2008, 08:48
IMO 'C'

If the companies are making new investments, they should be aware that there will be no net gain for many years, till the investments are paid by savings in new processes.
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Re: Investments [#permalink] New post 02 Sep 2008, 08:50
OA is D
Re: Investments   [#permalink] 02 Sep 2008, 08:50
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