How to crack XAT Decision Making – Part II

In the previous post, crack XAT Decision Making- we discussed how Decision Making can be the undoing of XAT aspirants and tried to understand the nature of questions that come up on the section. We took up two sets from the Decision Making section of a past XAT and discussed a structure to answer DM questions. In this post, we shall look at the remaining questions from that paper.

SET 3: Information + Number based Business Set

Answer questions on the basis of information given in the following case.

A few years back Mr.Arbit and Mr.Boring started an oil refinery business. Their annual earning is currently just 50,000 million rupees. They are now exploring various options to improve the business. Mr.Xanadu, a salesperson from Innovative Technology Solutions (ITS), is trying to sell a new oil refinery technology to Mr.Arbit and Mr.Boring. This technology could potentially enhance their annual earning to 150,000 million rupees within a year. But they have to make one-time investment of 100,000 million rupees to implement the technology. If the technology is not successful, the investment would be lost. Mr.Arbit and Mr.Boring are discussing possible risks of the investment.

1. Mr.Arbit is enthusiastic about this investment idea but Mr.Boring is a little sceptical.

This impasse makes them approach a consultant. The consultant makes some observations. Which of the following observations, made by the consultant, might reduce Mr.Arbit’s enthusiasm for the new investment idea for crack XAT Decision Making.

• Investment is warranted only when benefits outweigh costs.
• Technology investments give higher earnings in future.
• Investment in technology leads to reduction of costs in the long run.
• Technology risks can be controlled.
• Business is all about taking risky decisions.

If you just read the case and go into the first question you will be left with two options. But before that who is take stakeholder from whose perceptive the options need to be evaluated? It is Mr.Arbit. Arbit is enthusiastic about the investment; we need to choose an option which will dampen it. (2), (3) & (4) highlight positive sides of the investment and hence will not dampen his spirits. We are left with (1) and (5). Unless we go back to the case we are better off tossing a coin at this point.

This is a business case but with very few numbers. Just so that the understanding is clear one-time cost – 100,000 million guaranteed to be incurred annual increase in business – 100,000 provided it is successful

So for the first year, the cost is equal to the increase in revenue. From the next year onwards, the annual increase in revenue is 100,000, but only if it is successful. (1) will affect Mr.Arbit’s enthusiasm adversely since it points out that investment should be done only if benefits outweigh costs. In this case for the first year, it is a no-profit, no-loss situation but only if the business succeeds. crack XAT Decision Making Since there is no probability given about the chances of the business succeeding this option should cast doubts in Mr.Arbit’s mind. Also, the statement is phrased negatively — warranted only if. (5) is something that Mr.Arbit is aware of and given his enthusiasm he might be willing to take the risks since the statement is phrased positively — business is all about taking risks — if anything it might egg Mr.Arbit on.

2. In order to sell the technology to Mr. Arbit and Mr. Boring, Mr. Xanadu is thinking of five possible sales pitches.

Which of the following sales pitches would reduce uncertainties the most for Mr. Arbit and Mr. Boring?

• All other competitors are aggressively investing in risky technologies.
• If the technology succeeds, the annual earnings would grow 3 times from the next financial year and they would be able to recover the invested money within 1 year.
• Preliminary studies indicate that success rate of the technology is 85%.
• The R&D team of ITS is working to counter any possible downside of the technology.
• Business is all about taking risky decisions.

The biggest uncertainty is not about the benefits but about the probability of success. Option (3) is clearly giving the success rate from which we can calculate that for Year 1 the net return will be 100000(.85) – 100000 = -15000 million. But from year 2 onwards it will be +100000 million. While (1) can be considered but it does not reduce uncertainty the way (3) does, hence (3).

3. Mr.Arbit and Mr.Boring did not invest in the new technology, but the new technology is a big success.

Repentant, they are now estimating the additional amount they would have earned (i.e. forgone earnings) had they invested in the new technology. However, the two owners differed on the expected lifespan of the new technology. Mr.Arbit expected lifespan to be 5 years, whereas, Mr.Boring expected it to be 2 years. After the technology gets outdated, the earnings from the business would drop back to 50,000 million rupees. What would be the difference between two expected foregone earnings after 5 years of the technology investment, if yearly earnings are deposited in a bank @10%, compounded annually?

Note: Forgone Earnings = (Earnings from business with new technology) – (Earnings from business without new technology)

It might be tempting to quickly assume that solving this question will involve a lot of calculation and hence letting it go. But as we discussed during our CAT sessions always try to visualize how the calculation will pan out. There will not be any difference till the end of two years since both are projecting the same numbers. The difference is from Year 3 to Year 5 when Mr.Arbit is projecting the annual increase of Rs.100000 million to continue whereas Mr.Boring is not, which is nothing but 300000 if we do not calculate interest. Even if we do it will still remain in the 300000s. Hence, (2).

This would have taken another 10-15 minutes and at the end of 30 minutes, you should have 5-6 marks. You should know that at this point you are halfway there. In the next 10 minutes, you need to answer another 3-4 questions and move on to another section.

Business + HR Set

Answer questions on the basis of information given in the following case.

Life saving Pharmaceuticals (LSP) is India-based Pharmaceuticals Company. Their business mostly revolves around a couple of generic drugs and a few patented drugs. LSP operates in 30 odd countries and more than 50% of their sales volume is from outside India.

If more than 50% of their sales volume is from generic drugs, which of the following options is definitely correct? (Note : All percentages figures are with respect to total sales volume)

1. If sales volume of patented drugs in India is 43%, the sales volume of generic drugs in India will be less than 43%.
2. If the sales volume of generic drugs in foreign countries is at least 24%, the sales volume of patented drugs in India will be above 24%.
3. If the sales volume of patented drugs in India is 54%, the sales volume of generic drugs in foreign countries will be above 54%.
4. If the sales volume of patented drugs in India is 29%, the sales volume of generic drugs in foreign countries will be above 29%.
5. If the sales volume of generic drugs in India is at least 60%, the sales volume of patented drugs in foreign countries will be above 60%.

This is not a tough question but a tricky one. Even if one understands logic it can get confusing to do it over 5 options. It becomes easier if one visualises the whole situation as a 2 by 2 matrix

	INDIA	ABROAD
GENERIC	A	B
PATENTED	C	D

For each case, you have to substitute values of A or B in the grid and see of the inferences must be true. The answer is option 4. This topic Help to the crack XAT Decision Making.