ABC Corp. is an information technology company. The IT department wants to upgrade the firm's technological infrastructure but the cost of upgrading is likely to take up at least 60 percent of the firm's cash reserves. The finance manager is reluctant to release funds for this purpose. According to him, "The economy is still in a state of uncertainty. The company is better off preserving its cash reserves rather than investing it."
-Which of the following, if true, would most support the finance manager's point of view?
A) There is a correlation between a firm's level of technological investment and its long-term growth.
B) Gains from technology are hard to predict on account of uncertain demand.
C) The returns from other investment opportunities are much more attractive.
D) Recent reports suggest that the economy is yet to fully recover from the recession.
E) Banks are hesitant to lend to the company on account of uncertain economic conditions.

Question

Quizplus · Accepted Answer

If banks are hesitant to lend to the company due to uncertain economic conditions, it may be difficult for the company to obtain funds if it exhausts its cash reserves on the technological upgrade. This justifies the finance manager's decision to preserve the firm's cash reserves rather than take on additional debt. All of the other options either support the argument for upgrading the technological infrastructure or do not directly relate to the argument being made by the finance manager.

ABC Corp Is an Information Technology Company