GMAT Focus EditionVerbal ReasoningMedium
A company is considering investing in a new automated production line, claiming it will significantly reduce labor costs and increase output. A financial analyst, however, points out that the initial investment for the automated line is substantial and the training required for the remaining human operators will also be costly. The analyst concludes that the company's projection of significant cost savings is overly optimistic. Which of the following, if true, would most strongly support the company's projection?
- ACompetitor companies that invested in similar automation have reported a short payback period for their initial investment.
- BThe increased output from the automated line is expected to open up new markets for the company's products.
- CThe new automated line requires less maintenance than the current production equipment.
- DThe cost of raw materials for the company's products is expected to rise significantly in the coming years.
Show answer & explanationAnswer & explanation
Correct answer: A. Competitor companies that invested in similar automation have reported a short payback period for their initial investment.
The analyst's doubt is based on the initial investment and training costs. If competitors have achieved a short payback period, it suggests that the cost savings and increased efficiency (implied by the payback) quickly offset these initial expenses, thereby supporting the company's projection of significant cost savings.
Why the other options are wrong
- B. Opening new markets relates to increased revenue, not directly to 'significant cost savings,' which is the focus of the analyst's doubt.
- C. Reduced maintenance costs are a saving, but might not be substantial enough to offset the *significant* initial investment and training costs, nor does it address the 'optimistic' claim as directly as competitor success.
- D. Rising raw material costs would likely *reduce* overall profitability, making cost savings from automation even more critical, but it doesn't directly support the *projection* of those savings being significant.
Supporting Financial Projections
To support a financial projection, provide evidence that validates the underlying assumptions about costs, revenues, or efficiency.
- Look for industry benchmarks.
- Evidence of unforeseen savings.
- Confirmation of revenue increases.
Memory trick: To make a claim stand tall, find a strong pillar, or watch it fall!