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

Question 1. Q1. Which option has the lower upfront cost, and by how much?

• A) Option 2, by 30,000 dollars ✓
• B) Option 1, by 30,000 dollars
• C) Option 2, by 20,000 dollars
• D) The two options cost the same

Explanation: The answer is A (Option 2, by 30,000 dollars). The table lists Option 1 at 80,000 and Option 2 at 50,000, so Option 2 costs less and the gap is 80,000 minus 50,000, which is 30,000. B reverses which option is cheaper. C uses the wrong difference; the gap is 30,000, not 20,000. D is wrong because the two upfront costs are not equal.

Question 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?

• A) Sunk cost
• B) Opportunity cost ✓
• C) Fixed cost
• D) Economy of scale

Explanation: The answer is B (opportunity cost). Opportunity cost is the value of the next-best alternative that is given up when a limited resource is committed to one use. A is wrong: a sunk cost is money already spent that cannot be recovered, but here no money has been spent yet. C names a cost that does not change with output and does not describe a forgone alternative. D refers to falling average cost as volume rises, which is not what choosing between the two projects illustrates.

Question 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.

• A) 1 year
• B) 2 years
• C) 3 years
• D) 4 years ✓

Explanation: The answer is D (4 years). Payback equals upfront cost divided by added profit per year: 80,000 divided by 20,000 equals 4 years. A, B, and C each divide incorrectly; only 80,000 / 20,000 = 4 matches the table values. For comparison, Option 2's payback is 50,000 / 20,000 = 2.5 years, but the question asks about Option 1.

Question 4. Q4. Using the payback formula from Question 3, why does Option 2 fit the goal of the fastest payback better than Option 1?

• A) Option 2 earns more profit per year than Option 1
• B) Option 2 carries higher risk, which speeds payback
• C) Option 2 recovers its cost in fewer years because it costs less while earning the same annual profit ✓
• D) Option 2 takes longer to launch, which shortens payback by reducing its upfront cost and risk for the company in question

Explanation: The answer is C. Both options add 20,000 in profit per year, but Option 2 costs only 50,000 versus 80,000, so it pays back in 2.5 years versus 4 years: a lower cost at the same annual profit means fewer years to recover. A is false because the annual profit is equal for both. B is wrong because risk level does not shorten a payback period. D misreads the table and reverses the logic; a shorter launch time does not by itself change the payback calculation, and Option 2 actually launches sooner, not later.

Question 5. Q5. Given the goal of the fastest payback, which recommendation is best supported by the figures?

• A) Choose Option 1, because its payback of 4 years beats Option 2
• B) Choose Option 2, because its payback of about 2.5 years is faster than Option 1's 4 years ✓
• C) Choose Option 1, because it has the lower upfront cost
• D) Choose neither, because equal annual profit means the two options have the same payback within this business context

Explanation: The answer is B. The decision criterion is the fastest payback, and the payback figures are 2.5 years for Option 2 and 4 years for Option 1, so the figures support choosing Option 2. A states the wrong payback ranking. C names the wrong option as cheaper; Option 2, not Option 1, has the lower upfront cost. D is wrong because equal annual profit does not make the projects equivalent once their different costs and paybacks are considered.