Application of Divisional Discount Rates

The application of the new system got its first test when the auto airbags production division and the aerospace division simultaneously submitted four proposals.

Proposal A

The auto airbags production division submitted a proposal for a new airbag model that would cost $2,355,600 to develop. The anticipated revenue stream for the next 10 years was $400,000 per year.

Proposal B

The aerospace division proposed the development of new radar surveillance equipment. The anticipated cost was $2,441,700. The anticipated revenue stream for this project was $450,000 per year for the next 10 years.

Proposal C

Proposal C was a second proposal from the auto airbags division. It called for special equipment to be used in the disposal of environmentally harmful waste material created in the manufacturing process. The equipment cost $145,680 and was expected to provide cost savings of $15,000 per year for 15 years.

Proposal D

Proposal D was a second proposal from the aerospace division. It called for the development of a new form of a micro-electric control system that could be used for fighter jets that were still in the design stage at another aerospace company. If the other aerospace company was successful in the development of the fighter jets, they would be sold to underdeveloped countries in various sectors of the world. The cost to produce the micro- electric control system was $1,262,100 and the best guess estimate was that the investment would return

$300,000 a year for the next eight years.