Suppose a business has invested $10 million in computers that can be used to des

Question

Suppose a business has invested $10 million in computers that can be used to design a new product. The computers can be sold and used in an alternative production process for a maximum price of $7 million. The cost of further development of the new product is $5 million. That $5 million could be spent to develop an alternative product that will generate $20 million in profits (total revenues minus total costs). Revenues would have to be larger than which of the following to justify a continuation of the development of the product? 0 A $12million O B $15 million O c $27 million O D S3O million O E $42 million

Explanation / Answer

Amount invested initially in computers was $10 million, out which $7 million can be obtained, resulting a loss of $3 million. New project will require $5 million that will generate $20 million in profits. And $5 million can be taken from the $7 million obtained by selling computers. So, revenue would have to be larger than $12 million because initially there was a loss of $3 million which will be added to the cost of establishing a new project that will generate a profit of $20 million. => net profit = $20 million-(cost of new project + initial loss)

net profits = 20- (5+3)

= 12

So, answer is A $12 million

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