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AP Business with Personal Finance: Strategy and Decision Making Drill 26

Drill 26 ·

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About This Drill

AP Business with Personal Finance: Strategy and Decision Making Drill 26 is a practice drill. It contains 5 original questions created by Brian Stewart, a Barron's test prep author with over 20 years of tutoring experience.

A strategy and decision-making drill in which a lamp maker weighs two growth options against a stated payback criterion; it uses an invented company and original figures.

Passage

Brightmoor Lamp Co. designs and sells table lamps. It has 90,000 dollars of cash to invest in one growth project this year and is choosing between exactly two options. Option 1 is to open a second retail showroom in a nearby city. Option 2 is to launch a new outdoor-lamp product line sold through its existing store. The owner has compared the two options on four criteria.

Brightmoor Lamp Co.: Two Growth Options (dollars; launch time in months)

CriterionOption 1: Second showroomOption 2: Outdoor-lamp line
Upfront cost80,00050,000
Expected added profit per year20,00020,000
Risk levelHigherLower
Time to launch9 months4 months

Questions in This Drill

  1. Q1. Which option has the lower upfront cost, and by how much?
  2. Q2. Because the 90,000 dollars can fund only one project this year, choosing one option means giving up the profit the other option would have produced. What concept does this best illustrate?
  3. Q3. Payback period is the upfront cost divided by the expected added profit per year. What is the payback period for Option 1, the second showroom? Round to the nearest whole year.
  4. Q4. Using the payback formula from Question 3, why does Option 2 fit the goal of the fastest payback better than Option 1?
  5. Q5. Given the goal of the fastest payback, which recommendation is best supported by the figures?